[lz221476]

The question might be stupid, but it did bother me for a while. when I was at school, teacher told us whenever cash is received, the Cash account is debited (and another account is credited). Whenever cash is paid out, the Cash account is credited (and another account is debited).

But I couldn’t understand why debit dividends and credit revenues and incomes. Dividends will be distributed to share holders and the amount of cash will be decreased, so I think it should be credited. Also incomes and revenues will increase the cash flows, it should be debits too.

Hope someone can explain that for me in plain English, thanks!

[littlenumberrobot]

T-accounts can be tough to get at first, but once you comprehend them you are golden!

1) When dividends are paid out you will credit cash (cash leaving) and debit dividends (assuming there wasn't an accrued dividends payable). Later when you close the year this account will be combined with retained earnings, as earnings were distributed out (to shareholders).

2) This one was tough for me when I was learning t-accounts. It's a credit because cash is coming in to bank account (DEBIT) and there must be a credit to income/revenues.

I hope I helped… It may be more helpful to draw out the t-accounts yourself. Essentially liabilities, income and common stock are CREDITED to increase. Opposite assets, expenses and dividends/distributions are DEBITED to increase.

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[Iron_Victory]

Revenues are credits for 2 reasons, 1) they are the opposite of debits to our cash and 2) they increase Retained Earnings which is an equity account and has a natural credit balance. Which is how the Income statement interacts with the Balance sheet.

I had a Professor that referred to RE as “the place where Net Income goes to die” I don't know why but it has stuck with me.

So we have

Revenues (credits) – Expenses (debits) = Net Income (Credit RE) or Net Loss (Debit RE)

In the case of Dividends paid or payable this is a reduction to our Equity account of Retained earnings (again natural credit balance). So it must be a debit if we are to reduce.

Dr RE

Cr Dividends Payable

Dr Dividends Payable

Cr Cash

AUD - (74),78
BEC - 85
FAR - 86
REG - 84

[Author]

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