Question

Newton company settles a liability by making a payment in cash. How does paying this liability affect the accounting equation of the business?

Answer 1

Regular payment of dividends provides an incentive for additional investors to become stakeholders in your business and keeps current stockholders happy when times are good. The payment of both cash and stock dividends impacts the accounting equation by immediately reducing the amount of retained earnings for the company. This requires offsetting accounting entries in other financial accounts with slight changes based on the type of dividend provided.