SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

MODULE 3 - DIVISIBLE PROFIT

SYNOPSIS:

 Concept of Profit.
 Meaning of Divisible Profit.
 Dividend and Types.
 Determinants of Divisible Profit.
 Principles of Divisible Profit.
 Profit v/s Divisible Profit.
 Legal Views on Divisible Profit.

Concept of Profit:

The main objective of any business organization is profit, but the term ‘profit’ does not have any
exact meaning in the accountant’s language.

The Companies Act does not lay a clear meaning of the term, “profits’. It is practically silent on
the issue.

Profit may be defined “as the increase in the net value of assets of a business over their net value
at the commencement of a given period which has arisen other than by capital adjustment”.

According to the viewpoint expressed by the court in the case Spanish Prospecting Co. Ltd.
(1911), “the profit of an enterprise can be ascertained by computing the market value of its
net assets at two accounting dates. The increase or decrease in the net worth is the profit or loss
for the intervening period”.

Meaning of Divisible Profit:

Funds are a must for starting a company. The shareholders contribute to the capital of the
company. These shareholders are entitled to a share in the profits which the company makes.
However, not all the profits made by the company is to be distributed to the shareholders.

Only divisible profits are available for distribution to the shareholders. The Companies Dividend
Rules, 2014 are applicable in declaration and payment of the dividends by the company.

It is rather difficult to give a precise definition of the term ‘Divisible Profits’. Divisible profits
have not been defined anywhere in the Companies Act, 2013.

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

The following arguments may, however, be examined:

“Profits available for Dividend” mean “net profits after making any deductions which the
Directors can duly make.” -Fisher vs. Black & White Publishing Company (1901)

Different opinions are given on the subject. Even if the profits are arrived at, it is not easy to say
that all of these are Divisible Profits. Thus, all profits are not and cannot be Divisible Profits.
Only those which can be legally distributed amongst the shareholders are ‘Divisible Profits’.

The portion of profit, which can legally be distributed to the shareholders of the company by way
of dividend, is called the ‘divisible profit’.

What is meant by Dividends?

Dividends are a form of reward that the company gives to its

shareholders. Dividends can be given either in cash or in the form of
stocks or in any other form.

According to the Institute of Chartered Accountants of India, dividend is a distribution to

shareholders out of profits or reserves available for this purpose. A company should not declare
divided unless there are:

 Sufficient profits
 Board of Directors recommendation
 An acceptance of the shareholders in the annual general meeting.

The Board of Directors is at discretion to recommend or not recommend a dividend for any year
financial year. If any dividend has not been recommended by the Board of Directors, the same
cannot be considered or approved for payment by the company. And if the rate of dividend has
been recommended by the Board of Directors, the company cannot increase the recommended
rate. Thus, the board of directors has the discretion to declare a dividend and the rate of such
dividend.

Different types of Dividend:

1. Final Dividend:
It is the amount of dividend paid annually, proposed by the board of directors and approved by
the shareholders in general meeting. It is known as final dividend because it is usually paid
subsequent to the finalization of accounts of the company.
No dividend is paid on calls in advance. And it’s the decision of company whether to pay
dividend to those shares having calls in arrears by providing for the same in articles of
association.

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

2. Interim Dividend:
It is the amount of dividend payable between the two Annual General Meeting before finalizing
the accounts. Articles of association should permit the company to pay interim dividend.If
Articles so permit, the directors may decide to pay dividend at any time between the two Annual
General Meeting. No Interim Dividend can be declared without providing for depreciation for
the whole financial year.

3. Cash dividend:
The cash dividend is the most common of the dividend types used. On the date of declaration of
dividend, the board of directors resolves to pay a certain dividend amount in cash to those
investors holding the company’s stock on a specific date. Usually companies having huge liquid
cash pay dividend in the form of cash.

4. Stock dividend:
Payment stock dividend is popularly known as issue of bonus shares in India. Issue of bonus
shares results in conversion of company’s profit into share capital. Companies, not having liquid
cash position, generally pay dividend in the form of shares by capitalizing the profits and
reserves.

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
 SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

Determinants of Divisible Profit:

The following four considerations may govern the

determination of Divisible Profits:

(1) Principles of Accountancy.

(2) Provisions of Memorandum of Association and Articles of Association,
(3) Legal Decisions, and
(4) Legal Aspect (as per the provisions of the Companies Act).

1. Principles of Accountancy

Divisible Profits were calculated as a surplus of income over expenditure for a given period. For
this purpose, all transactions were distinguished as capital and revenue. Such a distinction was
very important from the accountancy point of view, but a modified basis is now adopted to
calculate Divisible Profits and old practice has been recognized as inadequate and out of date.

To calculate Divisible Profits, the difference between assets and liabilities plus capital at the
commencement of a year (i.e., net worth of a business at the beginning) is found out. If assets are
more, there is surplus, otherwise there will be deficiency. Similarly, the surplus or deficiency at
the end of a year is calculated after considering in connection therewith the increase or return of

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
 SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

capital, etc. If there is a surplus, it is a profit and if there is deficiency, it is loss. This is now a
well-recognized principle for the determination of profits.

So far as the valuation of assets is concerned, fixed assets are valued at cost less depreciation and
similarly, floating assets are valued at cost price or market price, whichever is lower? Besides
this, necessary provision is made for losses of the current year and of the years to come.

According to the Principles of Accountancy, it is not proper to distribute capital profits as

dividends and it is also not advisable to distribute the profits of the current year without
providing for the losses of the previous years. Principles of Accountancy also advocate that
proper reserve should be created before profits are distributed among the shareholders by way of
dividends.

2. Provisions of Memorandum of Association and Articles of Association

These two documents are quite important and the amount of divisible profits is ascertained in
accordance with the provisions of Memorandum of Association and Articles of Association
which contain directions to be followed by the Directors for the determination of divisible
profits. It is, however, certain that the distribution of profit, which would affect the interest of
third parties or which would lead to the return of capital is against the principles and illegal. The
Directors recommend the distribution of profits as dividends after making necessary reserves and
provisions as required under the provisions of Memorandum of Association and Articles of
Association. This is usually the way they have to pursue.

The decisions made in the various cases have impressed upon the issue that the provisions of
Articles of Association should be fully observed and anything done against these rules will be
illegal. It is; thus, clear that the provisions of Articles of Association must provide a base for the
determination of Divisible Profits in case of a joint stock company.

3. Legal Decisions and Legal Aspect

Besides knowing the opinion of Courts expressed in different cases, the legal aspect of the issue
as provided by the Companies Act is quite important. The legal position has been made clear by
the Companies Acts, 2013. The provisions of law are now a ‘must’ for all limited companies in
India and serve as a guideline in the determination of Divisible Profits and distribution of
dividends.

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

Principles of Divisible Profit:

Following are the important principles of divisible profits:

1. According The Company Rules:-

The articles of association are the rules of the company. The directors are entitled to distribute
the profits under rules. They also follow the company law. The dividend can be paid out of
revenue profit.

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 purpose 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 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 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.

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.
SMDC, BALLARI. BCOM VI G/TPP – Con.Aud - M – 03 – 2022.

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. 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.

Profit v/s Divisible Profit:

From the desk of R H GURUPRASAD BABU., MBA, MPHIL, NET, MCOM.

HOD, Dept. of Commerce – BCom Gen
Shree Medha Degree College, Fort, Ballari.