What are profits?

he Courts have applied some rules to the calculation of profits.

(a) Profits can be trading or revenue profits. The Courts do not set any strict rules as to what is trading profit and generally leave that question to accountants and businesspeople. The Court may sometimes rule that some items must be included in, or excluded from, the calculation.

(b) Profits can be capital profits accrued from the increase in value of capital assets. These capital profits may be from a revaluation of capital assets or from the realization of capital assets.

(c) Dividends can be paid from one year's revenue profits without needing to make back past revenue losses - but only if the company remains solvent.

(d) The company must have earned profits in order to declare and pay a dividend, but it does not need to have collected them. A company can borrow the money to physically pay the dividend, as long as the profits have been earned and are collectable. The principle is designed to set the upper limit on the source of the dividend to profits earned, not on the capacity to pay the dividend. But, the company must be solvent at the time and remain solvent after the dividend.