“Profits available for dividend to shareholders are known as divisible profits.” According to strict accounting perspective, it is necessary that businesses should declare dividends, unless they have compelling reasons otherwise, only if there is profit after fulfilling all expenses, depreciation on fixed and fluctuating assets, losses, writing off previous losses, taxation, and after the transfer of at least the minimum legal amount to reserves.
Extraordinary profits such as non-recurring profits or profits resulting from fixed assets’ sales or fixed liabilities’ redemption are not distributed as dividends. Judgment demands that businesses should not revalue assets upwards. Regarding dividends, the assets of the concerned company should be complied with unless these breach the provisions of law.
Dividends can only be declared out of profits. When a business declares and pays dividends, where there is no profit, the directors have to pay the amount from their pockets.
Use of the term in Sentence:
- The professor is discussing divisible profits in the accounting class.
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