In accounting, how should dividends paid be recorded?

Dividends paid should be recorded as a debit to retained earnings because when a company pays dividends to its shareholders, it is essentially distributing a portion of its profits. This distribution reduces the total amount of retained earnings, which reflects the cumulative profits of the company that have been reinvested in the business. By debiting retained earnings, the accounting records accurately reflect the decrease in retained earnings as the dividends are paid out to shareholders.

Establishing the impact on the accounting equation, when dividends are declared and paid, the retained earnings account is reduced. This aligns with the principle of maintaining accurate records of what portion of the company's profits remains available for reinvestment in the business versus what has been distributed to its shareholders.