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Tax Summary Report - Retained Earnings, again

This is a follow-up to my earlier posting here:

My journals are now all up-to-date and correct for CT and Payroll. The issue of the “Total Distributable Profit” shown in the “Tax Summary” still looks incorrect.

It looks to me like there’s a fundamental problem with this functionality as it’s useless to me to for the advertised purpose of showing available dividends for distribution in the current period. Or am I trying to use it for something it isn’t supposed to do?

Can anyone shed any light on this?

Thanks, Keith

Sounds to me like you haven’t journaled something correctly.

If you had tagged any outgoings as dividends it would show on the balance sheet before retained earnings. If outgoings are posted to the DLA Then retained earnings would be higher because its expecting you to repay that money to the dla again.

Hi Paul,

Thanks for getting back to me. I’ve checked and all dividends have been paid - there are no dividends posted to the DLA.

My gut feeling is that the report is using the sum of retained earnings since incorporation, rather than retained earnings for the period. At the beginning of an accounting period the retained earnings are carried forward from the previous period. The retained earnings for the current period can be calculated as initial RE carried forward + net income (or loss) - dividends paid. I don’t expect the calculation for available dividends in the current period to use the sum of RE at the end of each accounting period to date. In my mind it should look at just the current period’s RE. Does that make sense?

Thanks, Keith

Retained earnings are, by definition, the sum of the accumulated profits and losses in the years since you started trading. This is why it shows as the sum of each year-end journal. The Aggregate Profit/Loss then adds on the current year’s profit (or subtracts the loss). If there have been dividends paid in the current year, these are also taken off to arrive at Total Distributable Profit.
You cannot pay dividends unless there are sufficient reserves - you cannot just look at the current period you must take into account the reserves brought forward when determining how much your distributable reserves are. If you had made losses for the first three years, and then made a profit in the fourth year, you are not allowed to pay out that profit as dividends - you must first subtract the accumulated losses and only then, if there is still money left, can you pay a dividend.
The £25,000 you mention is not money that is in your bank account - if you look at the balance sheet you will see that retained earnings plus the current year’s profits to date plus share capital are equal to the sum total of your assets less your liabilities, i.e. it will be your bank balance plus any money owed to you plus fixed assets less any debts you owe.

Feel free to message me if there’s anything you’re still unsure of.

Claire

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Hi Claire,

Thanks for the detailed reply - much appreciated. I’ll mull it over and look at the balance sheet and do my sums so it makes sense with my figures.

I’m still not sure (right now) that the report telling me I can pay out more dividends than I have funds in the bank is useful. Or am I missing the point of this report?

Keith

Hi Keith,

I think you are missing the point! It’s not your bank balance that determines whether you can declare dividends or not, although that obviously affects your ability to actually pay them.
If you have made enough profits, you can withdraw those profits in the form of dividends - you can declare them and put the entries through to recognise the liability (usually through the directors’ loan or current accounts), then pay them at a later date when you do have funds in the bank account.

Claire

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