Declaration of dividend and transfer to general reserve.

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Querist : Anonymous

Querist : Anonymous (Querist)

29 October 2013 A company having three dependent units have loss in one unit. Company declare a dividend and transfer certain profit into General Reserve. Company also prepared separate Balance sheet of each unit. Such dividend and general reserve are transferred from a loss unit out of Opening balance of surplus. There is any provision regarding to transfer to general reserve out of only current year profit, and also declared dividend only out of current year profit? (Company regularly declare dividend and transfer to general reserve each year.)

Ajay Mishra

Ajay Mishra (Expert)
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30 October 2013 Hi

The dividend is decide under the Companies Act, 1956 on the basis of profits available to the company as given in balance sheet and not on the unit basis.

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Ajay Mishra

Ajay Mishra (Expert)
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30 October 2013
In case if the current year's net profits are not adequate or not available, a company may draw the required amount from reserves created out of transfer of profit in previous years as per the Companies (Declaration of Dividend out of Reserves) Rules, 1975 (Appendix 2) subject to the following conditions:—
(i) The rate of dividend declared shall not exceed the average rate of dividend declared in the five years preceding the current year or 10% of the paid-up capital, whichever is less.
(ii) The maximum amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed 10% of the paid-up capital and reserves and the amount so drawn shall be first utilised for writing off losses incurred before declaration of any dividend in respect of preference or equity shares.
(iii) The balance remaining in the reserves after such drawal shall not fall below 15% of the paid-up share capital.
However, the above said conditions will not be applicable for utilisation of any profit earned in any previous years and remains as surplus balance of profit in the profit and loss accounts and carried to the balance sheet of the company.

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