Unit – 3 : Divisible Profit

By RADHIKAFaculty of Auditing

J H B W C

Introduction Divisible Profit Dividend Profit

Cont. “The profits available for the distribution

among the shareholders of a company as dividend are called divisible profits.”

The profits are calculated by comparing the income and expense of one year.

The necessary adjustments are made before calculating the profit of a business concern.

The accounting principles are followed. The directors have the right to create provisions, reserves and funds out of business profits under the articles of association.

Cont. Keeping in view business conditions, the directors can

propose the rate of dividend in annual general meeting. The proposed dividend is paid with in 45 days after the

declaration of it. Dividend must be paid out of the revenue profits. The correct calculation is essential for all who depends

upon business. It is clear that divisible profits are profits available for

shareholders in the shape of dividend.

There is no any particular rule about the determination of profit. But company law has laid down the following rules or principles which guides us to determine the divisible profits.

Guiding Principles of Div. pro.1. According The Company

Rules 2. Follow The Court Cases 3. Profit Not Out Of Capital 4. Approval Of Shareholders 5. Right Of Proposal 6. Undistributed Profit 7. Depreciation

8. Secrete Reserves 9. Capital Profits 10. Capital Loss 11. Loss Of Provision Year 12. Revaluation Of Assets13. Revenue Profits14. Asset Goodwill Written

Down & Up

Importance of Correct Profit1.True Disclosure [as auditing]

2. Consistency [fluctuations]3. Follow Law [computation]4. Protect Creditors [the value of assets]5. Correct Valuation [imp. For any situation]6. Stable Share Prices[induce mass investors]7. Manager Remuneration [satisfaction]8. No Undue Favor [favorite] 9. No Dividend Out of Anticipated Profit

Difficulties in Computation of Correct/ True Profit

Depreciation on the Assets Stock Valuation Valuation of Liabilities Deferred revenue exp. Intangible assets Provisions for Reserves Inflation Other problems

Difference between Profit & Divisible Profit

1. Definition

2. According to the law

3. Provisions of Articles of Association

4. Maintenance

5. Dividend

Dividend

The duties of auditor in regards to dividend

1. Examination of MoA & AoA2. Examination of minute books3. Transfer of amount of dividend4. Examine list of shareholders

i. Gross amt paid acc. To shareii. IT deductible from dividendiii. Net amt payable to sh. Ho after deduction of IT

5. 5. Correct computation of div. pro.6. In case of inadequacy of profit

Cont.

7. Dividend Warrants8. Unpaid dividend 9. Verify whether the dividend is taxable or tax free10. Incase of interim dividend he should examine the

resolution

Depreciation

Capital profit

Capital Loss

Past losses