Transfer of Minimum Required Amount for GR

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(Querist)


11 November 2010

In some final Accounts problems i solved, there is a statement " Transfer the Minimum Required Amount to General Reserve" and in the solution, 5% of NP is transferred. Where does it Say so, and why is it done like that?

Aditya Maheshwari (Expert)


11 November 2010

It is done as per Companies (Transfer of Profits to Reserves) Rules, 1975.

Percentage of profits to be transferred to reserves.-
No dividend shall be declared or paid by a company forany financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) of section 205 of the Act, except after the transfer to the reserves of the company of a percentage of its profits for that year as specified below : -
(i)
Where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent of the current profits ;
(ii)
Where the dividend proposed exceeds 12.5 per cent but does not exceed 15 per cent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 5 per cent of the current profits ;
(iii)
Where the dividend proposed exceeds 15 per cent, but does not exceed 20 per cent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 7.5 per cent of the current profits ; and
(iv)
Where the dividend proposed exceeds 20 per cent of the paid-up capital, the amount to be transferred to reserves shall not be less than 10 per cent of the current profits.

medini (Querist)


12 November 2010

as profits also come under the head general reserves, is this done only in order to prevent the distribution of entire amount of profits as dividend or is there any other logic to it?

Aditya Maheshwari (Expert)


13 November 2010

I do not understand with this logic as you can anytime transfer from reserves to the P &L A/c to distribute dividend in future years.



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