Before distributing dividend provision of depreciation on fixed assets has been compulsary under
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Answer:
Dividend is to be declared by the company at its Annual General meeting on such rate as may be recommended by board, and it has no power to declare dividend exceeding the amount recommended by the board. Once declared, it becomes debt payable by the company to its shareholders, who can sue the company for the non-payment of the dividend.
A company cannot pass a resolution for the declaration of dividend, without passing a resolution for the adoption of accounts. Hence, a company shall adopt its books of accounts first and then only, entitled to declare the dividend.
♠ Sources of Dividend
The basic principle of declaration of dividend is that it shall be paid out of profits only. However as per companies act dividend can be paid out of-
1) Current year’s profit of the company, or
2) Undistributed or accumulated profits of the previous years, or
3) Out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.
♠ Conditions required to be satisfied for declaration of dividend
1) Depreciation: – Before the declaration of dividend, a company shall provide depreciation to all its depreciable assets, in accordance with the rates or useful life, as the case may be provided in Schedule – II of Companies Act -2013.
2) Transfer to Reserves :- A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year, as it may consider appropriate to the reserves of the company.
3) Set off of previous year losses and depreciation: –A company shall not declare dividend unless carried over previous losses and depreciation not provided in previous year or years, are set off against profit of the company for the current year.
4) Free Reserves: – A company shall not declare or pay dividend out of its reserves, other than free reserves.