What happens to retained earnings when cash dividends are declared?

When cash dividends are declared, retained earnings decrease. This is because retained earnings represent the portion of a company's profits that have not been distributed to shareholders as dividends. Once the board of directors declares a cash dividend, the company's liabilities increase (due to the obligation to pay those dividends), and the retained earnings account decreases correspondingly.

This reduction reflects the fact that the company is distributing a portion of its accumulated profits to shareholders, thereby lowering the amount of earnings retained for reinvestment or to cover future expenses. The declaration of dividends does not affect the overall assets of the company directly; instead, it reallocates a portion of the equity by reducing retained earnings while increasing the liability for dividends payable until they are actually paid out.