Showing posts with label audit of divisible profits and dividends. Show all posts
Showing posts with label audit of divisible profits and dividends. Show all posts

Monday, July 31, 2023

Audit of “Divisible Profits” and “Dividends”

Audit of “Divisible Profits” and “Dividends”

Key Points:

1. Meaning of Profit.
2. Computation of Profit and Divisible Profit.
  (A) AOA or Articles of Association,
  (B) Companies Act,

Link : https://smckk14.blogspot.com/2023/07/audit-of-educational-institution-school.html

 

1. Meaning of Profit:

Profit = Sum of business Receipts less Expenses and losses.

Profit = Income (-) Expenses

Actual Profit means difference between market value of net assets of the business at the end and at beginning of accounting year.

As per Going Concerned Concept,

Profit = Revenue, Receipt from sales of goods and /or services (-) Expenses and losses of recurring nature.

Moreover, profit is that which has been actually ‘realized’, though it does not mean that goods should be actually converted into cash before saying that profit has been ‘realized’. However, sale of goods results in creation of book debts and bills receivable against credit buyers, only that part of the profit should be taken into account which remains after providing for possible bad debts.

There are Accounting Standards and GAAP or Generally Accepted Accounting Principles for determining the profit and it is no more open to the owners /managers to determine profit.

Overstatement of profit results in – (a) Payment of dividend out of capital, (b) Distortion of financial statement and this will harm the interest of all Shareholders, Creditors, Lenders, Government and Public.

Understatement of profit denies dividend legitimately due to shareholders, to workers the bonus, and to investors the appropriate to invest in business and to government the tax revenue.

2. Computation of Profit and Divisible Profit:

In case of ‘Sole Proprietorship’ or ‘Partnership Business’, the profits and divisible profits maybe interchangeable terms. But in case of ‘Company’, the company has to follow the following before deciding on distribution of dividend.

(A) AOA or Articles of Association,

(B) Companies Act,  

(A) AOA or Articles of Association:

Table ‘F’ of AOA limited by share, contains the following provision about distribution of dividend –

(i) Board to Recommend and General Meeting to Declare Dividend –

A company may declare dividend at its General Meeting but it cannot exceed the amount recommended by board. Clause (80) (But can decrease the amount)

(ii) Board can Announce and pay Interim dividend –

The Board may from time to time pay Interim dividend, if the payment is justified seeing profits of the company. Clause (81) however announcement can be revoked. It does not create enforceable right in favour of shareholders and against the company.

(iii) Dividend may be out post depreciation profits of the present, or past financial years, or out of money provided by Government –

Divisible profit should be calculated after providing depreciation for relevant year (s). Dividend may be declared out of money provided by Central or State Government (s) for distribution of dividend as per guarantee given by its section (123). Declaration of final dividend becomes an enforceable right against the company and it cannot back out on it.

(iv) Setting aside Profits or Reserve (s) –

Before recommending dividend, the board may at its description, set aside part of profits and reserve (s), or carry forward the entire profits without declaring dividend or creating reserve. The Reserve (s) maybe applied for the purposes of the company e.g. for meeting contingencies, equalizing dividend, etc. pending such application, the board may use the reserve (s) in company's business or invest it in other avenues, but not in share of the company. Clause (82)

(v)  Dividend to be Proportionate to the Amount Paid on Shares –

Dividend payment will be proportionate to the amount paid on shares. If entire call money has not been paid on certain shares, dividend pay on them will be proportionate to the amount actually paid, unless the AOA speaks of payment related to nominal value of shares. Amount paid or credited as paid against calls in advance will not be treated as amount paid on shares. However, participating preference shares may rank for dividend distribution out of profit in addition to fixed dividend payable to them. Clause (83).

(vi) Declaration for Unpaid Calls etc. –

The board may deduct from dividend payable to any member, any money presently payable by him on calls, or otherwise, in respect of shares held by him. Clause (84)

(vii) Payment maybe paid by Cheque and Warrant –

Any dividend, interest or other money Payable in cash in respect of shares may be paid by cheque or warrant. The cheque or warrant should be sent through post directly to registered address of shareholders, and in case of joint holders, to registered address of that shareholders who has first name in the register of members, or to any person or address as directed in writing by the shareholder (s). The cheque or warrant will be payable to order of the payee. Clause (85)

(viii) One or more Joint holders may be given receipt for Dividend –

Acknowledgement of receipt of dividend, bonus or other money payable in respect of share may be given by anyone or more of the joint holders. Clause (86)

(ix) Notice of Dividend Declaration –

Notice of any dividend declared by company must be given to person and entitled to share it. Clause (87)

(x) Dividend not to Carry Interest –

Dividend will not carry interest against the company. Clause (88)

(B) Companies Act:

(i) Payment of dividend only amount of post depreciation profit of relevant or post financial year –

Section 123, A company can only declare dividend out of profits of the relevant year. Dividend can be declared or paid by the company for any financial year only out of –

(a) Profit for that year, arrived at after providing depreciation, or

(b) Profits for any financial year or financial years, after providing depreciation for the relevant financial year (s), or

(c) Aggregate of its profits mentioned (a) and (b) above, or

(d) Any money provided by Central Government or State Government (s) for payment of dividend in pursuance of a guarantee given by it.

(ii) Dividend may be paid out of free reserves –

Specific reserves like debenture redemption reserve, will not be used for distribution of dividend.

(iii) Payment of Dividend from Accumulated Profits only as per Rules –

If the company process to distribute dividend even despite nil or inadequate profit, it may do so by transferring accumulated profits to reserves, but subject to the rules.

(iv) Interim Dividend –

Board may declare interim dividend from surplus of Profit and Loss account and current financial year profit. But if the company has suffered loss in the financial year up to the end of the quarter proceeding the declaration, the rate of dividend cannot be more than the average dividend declared during the immediate preceding three financial years.

(v) Deposit of Dividend in Separate Account in Scheduled Bank –

The dividend including interim dividend should be deposited in a special account in a Scheduled Bank within 5 days from the date of declaration. It will only be payable in cash to the registered shareholders or to his order by a cheque or warrant or through any electronic mode.

(vi) Capitalisation of Profits or Reserves –

The company is free to capitalise its profits or reserves to issue fully paid up bonus shares or to use for adjustment against any amount due from shareholder (s).

(vii) No declaration of dividend in case of noncompliance with acceptance as to acceptance and repayment of Deposits -

A company cannot declare dividend if it fails to comply with provisions of section (73) and (74) dealing with acceptance and repayment of deposit and interest of them.

(viii) No rights to dividend, rights of bonus shares until registration of transfer of shares -

As per section 126, If a company has received and instrument of share though it has not get registered it, it will transfer dividend in respect of such share to unpaid dividend account. However, the company may pay such dividend to the transferee specified in the instrument if the registered holder of share authorized it to do so in writing. However, it will put on hold any offer of right share or issue of fully paid up bonus share until registration of the transfer of share.

(ix) Punishment for Non-payment of Dividend after Declaration -

According to section 127, if the company has declared dividend but has not paid it or has not posted the warrant to the shareholder within 30 days of declaration, every director who is knowingly a part to the default, shall face imprisonment up to 2 years and pay fine of  100000 per day of default. The company will be liable to pay interest at 18% per annum during the period of default. 

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