How Is It Possible?

AS 1498 views 7 replies

Lakshmi

Student

1836 Points Posted on 30 May 2010

The depreciation is a non-charge, ie., a charge of depreciation reduces profit avail for distribution without reducing the avail cash. The cash thus retained in the business is intended to be used for replacement of the depreciable assets. For this reason section 205 of Company Act 1956 provides that Co. can pay dividend only out of profit avail after charging deprecition.

My question is that dividend is declared only after the charging the deprecition ,so here actually the avail cash is reducing bcoz of deprecition.So how the first line is applicable?

Replies (7)

vikaskamra

CA Final Student

132 Points Posted on 30 May 2010

Depreciation is a non-cash expenditure

hence, the profit is reduced not the cash....

CA. Praveen Gupta

346 Points Posted on 30 May 2010

par yaha par cash deprication ke karan kaha reduce hui

yaha to divident ke karan reduce ho rahi he

CA Anshu Agarwal

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1832 Points Posted on 30 May 2010

depreciation is non-cash expenditure, so charging of depreciation does not results into cash reduction.

and in ur question, cash is reduced due to paying dividend not charging the depreciation.

Shamili G A

Student

55 Points Posted on 31 May 2010

Ya anshu is rite....

the cash decrease is on declaration of dividend and not when depreciation is provided.....

NITIN JAIN

CA FINAL STUDENT

42 Points Posted on 31 May 2010

Dear,

Dep. allows as a non cash item. for this reasone cash will not reduce due to dep., but cash will be reduce when u will paid divident..

NITIN JAIN

CA FINAL STUDENT

42 Points Posted on 31 May 2010

Dear,

Dep. allows as a non cash item. for this reasone cash will not reduce due to dep., but cash will be reduce when u will paid divident..

CA Usha Rani Challa

139 Points Posted on 31 May 2010

Dep is a non-cash item. If u want to pay dividend then u have to see the availability of profit and not the availability of cash.

when u pay dividend ur profit will get reduced and also the cash.

For eg. let dep. is Rs. 10,000 and profit for current year before dep. is Rs. 1,10,000. Then after dep. ur profit will be Rs. 1,00,000 and cash will be Rs. 1,10,000 (profit for curr, year + dep). let dividend proposed is Rs. 50,000 then u have to look at the availability of profit and not cash. Here the profit is available, therefore u can pay the dividend, then after dividend ur profit will be Rs. 50,000 and cash will be Rs. 60,000. Thus by paying dividend ur cash is not reducing bcoz of dep. and the given first line is correct.