Q6: How do we account for a company declaring a dividend?
To recognise the declaration of a dividend the amount of the dividend is transferred from Retained earnings (equity) to Dividends payable (liability):
DR Retained Earnings $85m
CR Dividends Payable $85m
Directors declare a dividend: reduces equity (DR) and increases a liability (CR)
Retained earnings is an item of equity. By debiting Retained earnings we reduce it. Dividends payable is a transfer of value from a firm to its equity investors and is characterised as a current liability. This liability is created when the directors of a company declare a dividend and so commit the company to pay this dividend in the future.
Also, see Martin’s videos Accounting for Declaring a Dividend