I maintain a basic profit and loss account just for the director to have some idea of the monthly income and expenditure. Included in this is, income, less direct wages, less materials and plant, gross profit, less expenses, net.
The bookkeeper that worked here before me has never included dividends in the expenditure and when I include them the net profit is always a loss.
As semsley says dividends are a distribution of profits and dividends cant be legally paid if there is no insufficient distributable profits to cover the dividends. This will be made up of the distributable profits brought forward at the start of the year plus the distributable profits in the year ie profits after tax.
If they are making a loss after dividends then i assume they have distributable profits brought forward to cover the loss after dividends. Otherwise the dividends are illegally paid.
The key question is whether a dividend has been paid or money just drawn from the company. I personally prefer to allow a director a limited amount of drawing during the year then declare a dividend just before the year end to cover monies taken, profits permitting of course. This is also crucial to personal and corporate tax planning.
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Phil Hendy, The Accountancy Mentor
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