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Doubt in dividend adjustment in consolidation of accounts

sivaram (Asst Mgr-Taxation) (6918 Points)

26 September 2011

Can anyone explain as to why the Dividend is first geeting added in revenue profits and then shown as a deduction from capital profits in analysis of profits of Subsidary namely 96000 rs .The adjustment says rs320000 p&l out of which dividend is paid how to interpret that dividend has been deducted from revenue profits previously and added back to get net profit and then the source namely it is from capital profits and accordingly rs96000 is deducted

can any one explain in broef this adjusstment so that a layman like me can understand

Thanks in advance

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6 Replies

Amit Gupta (Loosening Myself) (1508 Points)
Replied 26 September 2011

Dividend is first added to revenue ie post profits if entry for this has been already been accounted for..and depending for which period the dividend has been declared.As in ur case the dividend hs been paid on the capital as on 1.4.2007 which means it is for f/y2006-07 thus should be reduced from capitlal i.e. pre profits while making AOP

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sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 26 September 2011

Amit this what i have to understand it says dividend has been declared out of 320000 p&l which is of capital profits then how come one says it is first deducted from revenue and then added to capital .The question says it is declared out of rs320000 p&l cant understand canyou elobrate a little bit

Amit Gupta (Loosening Myself) (1508 Points)
Replied 26 September 2011

The thing is when we prepare AOP, the two columns Capital and reveune are treated as Preprofits and post profits respectively..when the dividend has been declared and IF ENTRY HAS BEEN PASSED it means dividend amt has been reduced from post profits (revenue) and thus to arrrive at NET PROFITS we add it back ..and since the dividend is declared from the captial as on 1.4.2007 it generally means the dividend is for thef/y 06-07 i.e. from pre profits and thus should be deducted from pre profits accrordingly..And thereafter any time adjustement may be applied

For your reference check uploaded sheet

Attached File : 136512 838134 copy of 172448 838062 cons.xls downloaded: 300 times

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sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 26 September 2011

Amit you have really explained well but why they give the adjustment stating that dividend has been paid out of P&l balance of Rs 320000 i am getting an impression that it has been deducted from 320000 can u just explain why those wordings are given in the problem and what they mean by that ?

Amit Gupta (Loosening Myself) (1508 Points)
Replied 26 September 2011

As per section 205 of companies act, dividend can be declared only out of profits..Say if u wanna declare dividend for the year 2006-07, u cn declare only if u hv profits in that particular yr..THE WORDING OF QUESTION "dividend has been paid out of P&l balance of Rs. 320000" IS just to make it clear that the dividend has been paid for the f/y 2006-07 SO as to make it clear that it is dividend which is paid out of the profits belonging to Pre acquistion period.

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sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 26 September 2011

Thanks Amit for your valuable reply