Question

Adventures Unlimited Company distributes cash dividends. How does this transaction affect the accounting equation? Select one: A. The assets increase and liabilities decrease. B. The assets decrease and equity increases. C. The assets, liabilities, and equity remain the same. D. The assets decrease and equity decreases.

Answer 1

Answer: D. The assets decrease and equity decreases.

Explanation:

If you look at the Accounting entries for Dividends you will notice thus,

a) the Cash account is credited because the dividends are removed from it. As you probably know, when an asset decreases it is credited. This therefore means that Assets have reduced because Cash is an Asset.

b) Dividends are debited to the Equity Section of the Balance Sheet in the Retained Earnings account. A debit in the Equity section points to a reduction. This means therefore that the Equity balance reduces as well meaning Option D is correct.