Excess depreciation — OpenTuition Forums

JJiya0245y ago

Dear John, Am struggling to understand one thing. And that Is the transfer of excess depreciation from revaluation surplus(capital reserve from which Dividends can’t be paid) to retained earnings(revenue reserve). But for dividends to be paid cash should be there, and this transfers of excess Depreciation into retained earning doesn’t add cash! So why do we add it to retained earnings from where cash dividends are paid?

John MoffatTutor5y ago#1

In all circumstances, cash is needed to pay dividends. The law says that the maximum that can ever be paid is the balance on retained earnings. The balance on retained earnings is not ever going to be the same as the amount of cash available, and most companies do not pay the maximum dividend allowed by law, either because they do not have enough cash or because they want to use the cash to expand the company. The transfer of excess deprecation does not affect the cash, it only affects the maximum dividend that the company is legally allowed to pay.