Page 289 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 2. Follow the court cases: While calculating the divisible profits, the court cases must be kept
in mind. The auditors must know the decisions of the courts announced time to time.
3. Profit not out of capital: The capital cannot be used to pay dividend. The revenue profits
can be used for the payment of dividend.
4. Approval of Shareholders: In the annual general meeting, shareholders may approve the
rate of profit recommended by the directors. So divisible profits can be used to pay as
dividend after approval.
5. Right of Proposal: The directors can propose the rate of dividend out of divisible profits.
After completing the legal formalities the directors can decide the dividend.
6. Undistributed Profit: It is the right of the directors to use such profit for the payment of
dividend at the end of a year. It is a revenue of the provision year.
7. Depreciation: Before declaring revenue profits, the depreciation on fixed assets must be
charged. In manufacturing company it is compulsory to charge depreciation before the
declaration of profits.
8. Secrete Reserves: If according the articles association it is allowed to create and use the such
reserves then these can be used for the payment of dividends.
9. Capital profits: Under certain conditions the capital profit can be used to pay dividend but
articles of association should allow the distribution of capital profit as dividend.

10. Capital loss: In spite of capital loss, the dividend can be paid out of revenue profits. The
capital profit must be used to eliminate capital loss first and then surplus can be used to
pay dividends.
11. Loss of provision year: If a company suffers a loss in one year but earns profit next year,
such loss can be adjusted by the company from benefit of the current year.

12. Revaluation of assets: After the revaluation of asset, if it becomes surplus then it can be
used after realization and profit may be paid after selling the assets.
13. Revenue profits: According the principle of divisible profit dividend must be paid out of
revenue profit but it is essential that calculation should be correct.
14. Asset goodwill written down & up: If a company has written down good will out of
profits, it may also write up this asset, with the appreciation. But the value written up
should not excess than the true value.

Self Assessment

True or False:
1. According the principle of divisible profit dividend must be profit

2. If a company does not have written down good will out of profits, it may also write up this
asset paid out of revenue.
Fill in the blanks:

3. In case there is only one whole-time director in a company, maximum remuneration
payable to director will be ............................. of the net profit calculated u/s 349.
4. A ............................. cannot be the manager of the company.

282 LOVELY PROFESSIONAL UNIVERSITY