What is the relationship between retained earnings and dividends?

The statement that dividends are taken from retained earnings accurately reflects the accounting principle that retained earnings represent the accumulated profits of a company that have not been distributed to shareholders in the form of dividends. When a company decides to pay dividends, it does so by reducing its retained earnings, as these dividends are drawn from the profits that the company has retained over time.

This process emphasizes that retained earnings serve as a source of funds for dividend payments. When dividends are declared, they reduce the capital available within retained earnings, highlighting the direct financial relationship between the two. This incorporation of dividends into the retained earnings balance illustrates the flow of value from the company's profits to its shareholders and the impact of such distributions on the overall financial health and reserves of the organization.