Question

Which statement is incorrect? a. Dividends represent a distribution by a corporation to its stockholders. b. Dividends are shown on the income statement. c. Dividends reduce stockholders’ equity, thus the Dividends account increases on the left side. d. The Dividends account has a normal debit balance.

Answer 1

Answer:

b. Dividends are shown on the income statement

Explanation:

A dividend refers to that portion of profits which a firm decides to distribute to it's owners, as profits/losses of an entity belong to it's owners and shareholders.

A dividend initially is recommended by board to it's members. The members can reduce the rate of dividend proposed but cannot increase it. Once the resolution is approved, the dividend is to be declared by the board and becomes a liability.

Dividends are either paid from current year profits or past reserves and retained profits.

Dividends reduce stockholders equity since they are deducted from retained earnings which belong to the stockholders.

Dividends paid are not reported in income statement as these are apportionment of profits and not regarded as expenses.