Accounting Equations- How do dividends affect Assets

Hi everyone,

the following question is not clear to me:

Company ABC recorded $42,000 net income, declared $50,000 in dividends,and issued $7000 of new shares, What is the combined effect of these events on end-of-period assets and owners’ equity? Assets Owners’ equity A) Increase Decrease B) Decrease Increase C) Decrease Decrease


Net income and issuing new shares will increase assets and equity. Declaring a dividend will increase liabilities and decrease equity. Change in assets = $42,000 + $7,000 = $49,000. Change in equity = $42,000 + $7,000 - $50,000 = -$1,000.

The change in equity is clear to me:

Ending Retained Earnings=Beg. Ret.Earnings+ Net Income -Dividends=Beg. Ret.Earnings+ 42,000-50,000=Beg. Ret.Earnings±8000

Contributed Equity increases by $7,000

Total effect is: equity decreases by $1000.

But the change in assets I do not understand:

Assets (i.e. Cash) should increase by the Net Income of 42,000, and the money received for the new shares, $7000. But where does the money for the dividends come from. Shouldn’t there be a decrease in cash of $50,000 since the dividends are paid out in cash?

Declaring dividends reduces retained earnings and increases liabilities (Dividends Payable). It doesn’t affect assets.

Paying dividends reduces assets (Cash) and liabilities (Dividends Payable).

Eureka!!! I did not pay attention to that detail.

Thanks so much S2000!!!

You’re welcome.