Which of the following journal entries correctly records the declaration of a cash dividend payable to common stockholders?

• A. Debit Dividends Payable; Credit Cash
• B. Debit Cash; Credit Retained Earnings
• C. Debit Retained Earnings; Credit Dividends Payable
• D. Debit Common Stock; Credit Dividends Payable

Answer: (C)

Verified step by step guidance

1. Understand the concept: When a company declares a cash dividend, it is recognizing a liability to pay the dividend to its shareholders. This reduces Retained Earnings (a part of equity) and creates a liability called Dividends Payable.
2. Step 1: Identify the accounts involved. The declaration of a dividend affects two accounts: Retained Earnings (decreased) and Dividends Payable (increased).
3. Step 2: Determine the type of accounts. Retained Earnings is an equity account, and Dividends Payable is a liability account.
4. Step 3: Apply the rules of debit and credit. A decrease in equity (Retained Earnings) is recorded as a debit, and an increase in liabilities (Dividends Payable) is recorded as a credit.
5. Step 4: Write the journal entry. Debit Retained Earnings and Credit Dividends Payable to record the declaration of the cash dividend.