The entry to record a cash dividend payment is:

• A. Dr Bank; Cr Dividends
• B. Dr Retained Earnings; Cr Bank
• C. Dr Dividends; Cr Bank
• D. Dr Share Premium; Cr Bank

Answer: (C)

When a cash dividend is paid, the company is distributing part of its profits to shareholders, so cash must fall and equity must be reduced by the amount paid. The Dividends account is used to record this distribution, and it represents a reduction in retained earnings that is being paid out.

The correct entry debits Dividends to remove the distribution liability (or to reflect the reduction of the appropriation) and credits Bank to show the cash leaving the business. In other words, you are decreasing the cash balance and reducing the equity by the dividend amount. If the dividend had been set up as a liability when declared (Dividends payable), you would debit that liability and credit Bank on payment; the effect on the accounts is the same. This is why the entry with a debit to Dividends and a credit to Bank is appropriate for recording the cash dividend payment.