OMTEX CLASSES: No dividend can be declared without making provisions for reserves and depreciation.
No dividend can be declared without making provisions for reserves and depreciation.
Reasons: (1) Dividend is the return on share capital from the distributable profits of the company.
(2) Based on the rate of proposed dividend company is required to transfer a certain percentage to reserves as specified.
(3) E.g. Dividend of more than 20% of paid up capital entails a minimum of 10% of net profits to be transferred to reserves.
(4) Company may decide to transfer more than the stipulated rates voluntarily.
(5) Also, depreciation has to be provided for / from current / previous years profits.
These provisions help the company to become financially sound and solid.