Question

Difference between a cash dividends and an operating expense and why they have the same effect on stockholders' equity section (reducing the balance)

Answer 1

• Few points of differences between Cash Dividend and Operating Expenses are:

No.	Cash Dividend	Operating Expenses
1	It’s a cash payment made to stockholders	It’s a cash payment made to outsiders.
2	It is based on the amount of dividend declared.	It is based on amount of expenditure to be incurred.
3	It is required to give return to investors.	It is required to run business.
4	It is treated in Statement of Retained Earnings	It is treated in Income Statement.
5	It reduces Retained earning balance directly.	It reduces Net Income directly (and Retained Earnings indirectly)

• Both have the same effect on Total Stockholder’s Equity (of reducing the stockholder’s equity balance), because both are in nature of expense with debit balances.

---- Operating Expenses reduces Net Income. Reduction in Net Income leads to reduction in Retained Earnings. Reduction in Retained Earning leads to reduction of Total Stockholder’s Equity.

Operating Expenses à Reduces Net Income àReduces Retained earnings à Reduces Total Stockholder’s Equity.

----Cash Dividends are deducted under Statement of Retained Earnings. This reduces Retained earnings balance directly. When retained Earnings decreases, the total balance of Stockholder’s Equity also gets reduced.

Cash Dividend à Reduces Retained earnings à Reduces Total Stockholder’s Equity.