Which sequence of entries correctly records declaration and payment of cash dividends?

• A. Declaration: Debit Retained Earnings; Credit Dividends Payable; Payment: Debit Dividends Payable; Credit Cash
• B. Declaration: Debit Retained Earnings; Credit Cash; Payment: Debit Dividends Payable; Credit Dividends Payable
• C. Declaration: Debit Dividends; Credit Retained Earnings; Payment: Debit Cash; Credit Dividends Payable
• D. Declaration: Debit Retained Earnings; Credit Dividends Payable; Payment: Debit Dividends Payable; Credit Cash

Answer: (D)

When dividends are declared, the company is acknowledging an obligation to shareholders and reducing the owners’ claim on the business. The proper entry is a debit to Retained Earnings (reducing equity) and a credit to Dividends Payable (creating a current liability). Later, when the cash is actually paid, the company settles that obligation by debiting Dividends Payable (reducing the liability) and crediting Cash (reducing the asset).

This two-step sequence matches how dividends flow: first the declaration creates the payable, then payment discharges it. Recording cash at declaration or debiting the wrong account (like Dividends) would misstate either equity or the liability, which is why those options aren’t correct.