As you all know, the ultimate effect of incurring an expense is to reduce stockh

Question

As you all know, the ultimate effect of incurring an expense is to reduce stockholders' equity. In this chapter, we have learned that the declaration of a cash dividend also reduces stockholders' equity.

Please discuss/explain the difference between an expense and a cash dividend and explain why they have the same effect on stockholders' equity.

As you all know, the ultimate effect of incurring an expense is to reduce stockholders' equity. In this chapter, we have learned that the declaration of a cash dividend also reduces stockholders' equity.

Please discuss/explain the difference between an expense and a cash dividend and explain why they have the same effect on stockholders' equity.

Explanation / Answer

Expenses are the economic costs that a business incurs through its operations to earn revenue.

Cash dividend is the Money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors and are taxable as income to the recipients.

Stockholder's equity is defined as the total amount of capital present in the company divided by the number of stockholders with their corresponding shares.

Now as an expense reduces the total capital present in the company's fund it reduces the equity.

Also, when dividend amount is paid to the stockholders it is taken from the company's common fund which will result in reduction of total capital while the number of stock holders is constant. So , this will also result in decrease of equity.

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