Q.1 What do you understand by term “Devisable Profits”? What are important provisions of Companies Act in this regard?
Ans
Divisible profit is that part of net profit out of which divided can be declared so that capital is not distributed in the form of dividend .In other words, it is that net profit which is available for appropriation including dividend distribution.
Section-205 of Indian company's Act-1956
(i) Sources of dividend (section-205(i) :- Dividend can be distributed from the following sources :-
1- Profit of the year
2- Profit of the previous years.
3- Out of total of above
4- Amount received from govt. for payment of dividend.
(ii) Dividend out of above sources can be distributed after making following deductions:-
- Current depreciation :- (section-205(2) ) on assets (depreciable assets) at the rate specified in table xiv of the Act.
- Transfer to reserves (section-205(2a))- A prescribed percentage of profit not more than-10% shall be transferred to reserves.
A higher percentage can also be possible if company wants to voluntarily transfer more amounts.
- Arrears of depreciation (section-205(a)) Arrears of depreciation not charged in the precious years should also be deducted for arriving at divisible profits.
- Past losses (section 252b) past losses of any previous financial year are also to be deducted.
- Hence profit available for appropriation and distribution for dividend would be arrived at after making deductions of above 4 points.
Q.2 Explain in brief capital profits.
Ans
Capital profit - Whether they are available for distribution as dividend?
Capital profit are those which are generated by sources other than routine business transactions such as :
- Premium on issue of shares/ debentures
- Amount of forfeiture of shares
- Profit earned before in corporation
- Profit from sale of fixed assets
The capital profit can be disbursed as dividend on fulfilling following conditions:-
(i) Articles of Association of company permits
(ii) Surplus has been realized in cash
(iii) Surplus remains surplus even after revaluations of all items of assets of company.
If seen from business angle, such capital profit should not be distributed but they need to be kept for use to write off capital losses which may arise in future.
Q.3 What do you understand by reserves & provisions? Differentiate between the two.
Ans
Reserve & Provisions
Provisions means any amount written off or retained by way of providing for depreciation, renewals, diminution in value of assets or for providing any unknown liability of which amount cannot be determined with a substantial accuracy, for example provision for bad debts, depreciation, and doubts full debts etc.
Reserve means setting apart part of profit to meet future contingencies or to strengthen financial position.
Difference between provision & reserve
Provisions Reserves
1. Created for specific purpose Created not for specific purpose
2. To be utilized for the purpose for Reserves can be freely used for
Which created any purpose?
3. Created compulsorily Created only out of profit profit or no profit
4. Created to meet likely loss Created to strengthen financial position or enhancing working capital
As regards reserves and provisions, auditor has to ensure that they have been created in accordance with:-
- Provisions of Indian Companies Act
- As per articles of association of a company
Provisions also depend upon financial prudence and looking to the nature of business. Auditor may look in to following:
1- Provision for bad & doubtful debtor:- On examination of debtors, auditor has to assess the likely doubtful and bad debts and provision for them should be made.
2- Provision for fall in prices of investment:- Which is known as investment fluctuation fund fraud to meet any contingency of fall in prices of investments.
For creation of reserve, this being a financial matter, it all depends upon the decision of management. He has to abide by bye laws or articles of association in this regard.
Secret Reserve
It is a reserve which exists but is not visible and does not appear in the B/s. It is hidden behind the cover of assets & liabilities. For e.g. book value of building is Rs. 10 lac after depreciation while it markets value is 40 lac. The secrete reserve exist to the extent of Rs.30 lac behind building in B/S. It is created by overvaluation of liabilities, under valuation of assets, not adjusting prepared expenses, treating capital expenditure in to revenue, making access provisions etc. It existence indicate strong financial position
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