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The owners of Acme Inc pays $1,000 in dividends this accounting period. How does this influence...

The owners of Acme Inc pays $1,000 in dividends this accounting period. How does this influence the level of retained earnings at the end of the accounting period relative to not having paid out any dividends?

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Answer #1

Generally company pays the dividend out of their net profit from the operation. However sometimes if the net profit is not sufficient and the company still wants to give dividend to the shareholders then the company might choose to pay the dividend from the the retained earnings. By doing this the balance of the retained earnings will reduce.

Retained earnings are those which company have earned during his past years have not been distributed as dividend to the shareholders but kept it as their retained earnings so as to use in business operation or any future dividend payout.

Therefore if the dividend paid out of retained earnings it will decrease the retained earning balance at the end of accounting period .

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