accounting question? please answer?

Question

when a company pays dividends. why is it that cash (asset) decrease and dividends increase? i understand why cash decrease because the company has to pay out. however, wouldn't dividends decrease because dividends is paid out, thus the company's worth or owner equity decreases?

Answer 1

Accounting's main principle is called double-entry system. So, when you decrease something (cash in your situation), you have to increase something (dividends). By increasing dividends, in retained earning statement you show how much dividends were paid during that period.
Debit: Dividends
Credit: Cash

Hope that helps

Answer 2

There are three dates that accounting entries are made for dividends. The declaration date, the date of record and the payment date. The dividends are recorded as a liability on the declaration date. When an asset is decreased, such as cash it is credited. And when a liability is discharged, or decreased, it is debited.

Answer 3

Think of it as a running total for dividends: As you pay more dividends, the total goes up. Because this total is a credit it represents an equal reduction in assets (cash or otherwise).

The double entry system can be a bit counter-intuitive at times but as you use the debit/credit system more and more it will become second nature for you.

Answer 4

you are using the word "dividends", but the full name of the account is probably "dividend expense." Its an account that records how much was paid out, so it increase as more and more dividends are paid.