Question

Why is the term liquidating dividend used to describe cash dividends debited against paid-in capital accounts?

Short answer

Step-by-Step Solution

Step-by-step solution

Explanation on dividends

Dividend is a return for the investment made in corporation. Generally Divided is declared by the board out of accumulated profits or retained earnings.

Step -2 Liquidating dividend explanation and treatment

Many state prohibits the payment of cash dividends in case Retained earnings deficit. However, few states allows such cash dividends by returning a portion of the capital contributed. This type of dividend is called a liquidating cash dividend or Liquidating dividend.

In this dividend debit entry is posted to contributed capital accounts instead of Retained Earnings at declaration.