UNDISTRIBUTED PROFIT OF THE ENTERPRISE, HOW TO USE?
Profit of an enterprise is an important part of its activity and functioning. What to do with retained earnings and how to write it off? A logical question arises: can I write off the expense of VAT profit on tax invoices that the supplier has not registered? If this can be done, is this necessary for this meeting minutes of the founders?
So, everything in order. It would be wrong to simply write off expenses from account 44 (retained earnings), for example, so that they would be charged by the tax authorities. If the amounts of such expenses are significant, this may lead to a distortion of the data in the financial statements. In this case, the reporting itself may be considered incorrect.
Firstly, to manage retained earnings it belongs to the exclusive competence of the meeting of participants. It is they who have the right to decide what to do with the “pure” profit of the enterprise, and how to use it.
Only in certain cases can expenses be reflected by a decrease in personal capital through account 44. For example, this can be the case when, following accounting standards, expenses should be shown by adjusting the balance of retained earnings or uncovered loss at the beginning of the year, that is, account 44 when:
- Correction of errors in previous years;
- When changing accounting policies in case of impact on past periods (retrospective rediscounting);
In all other cases when undistributed profit cannot be touched according to the legislation, any actions regarding the distribution of net profit can be performed solely on the basis of a decision (protocol) of the general meeting of participants in the enterprise.
Secondly, even though the owners of the enterprise have the right to manage the profit at their discretion, this does not mean that they have the right to finance any of their expenses. According to the accounting rules, any payments to the company are costs, so it will not be correct to write them off at the expense of the company’s profit. In this case, the financial report will be distorted.
Accounting is generally subject to the Regulation (standards) of accounting in Ukraine. In particular, they are enshrined in chapter 16 “Costs”. And if the costs of the enterprise fall under the definition of “Costs”, that is, a decrease in assets and an increase in financial obligations, then their use should be in accordance with these accounting rules. That is, expenses of a certain period can be recognized simultaneously with the receipt of the profit for which they were made. So, they affect the final financial result.
If expenses are not taken into account, this will lead to a distortion of financial statements. And the information that is provided in the financial statements must be reliable.
The same situation is with tax invoices that are not registered with the supplier. If the tax invoice is not registered, then the company actually loses the right to a tax credit. And paid by the supplier VAT cannot be refunded. That is, if tax is not included in the primary value of the asset, then this is recognized as an entity’s expense. But, the right to expenses in this case appears only after the supplier registers tax invoices.
This also applies to payments at the expense of profit.
The legislation established that bonuses and other financial rewards for employees are considered:
- current payments (that is, paid within a year after the end of the period in which the employee performed the relevant work);
- or impaired if the work is completed in this period and entitles employees to future payments;
That is, it is still considered the costs of the enterprise, which should be covered for “expense” accounts, and not through account 44.
Only for enterprises of state and communal forms of ownership it is possible to carry out the company’s profit on material incentives for employees. This is provided by law.
Of course, no one can forbid to dispose of property at their discretion, and the company can provide employees with financial incentives.
The tax authorities, for certain reasons, will only be glad that the company’s expenses pass by the expense items and will be written off due to retained earnings.
If we consider a situation where an LLC has not distributed profit among itself for a long time, then it is possible to acquire a fixed asset for work due to this?
This is not a simple mechanism, since an enterprise that has funds can buy a fixed asset for activity at the expense of fixed assets, as part of its business activities.
Reflect in accounting the purchase of fixed assets for the operation of the enterprise will not go directly through account 44.
Such a purchase will be reflected in a standard way. Due to retained earnings, it is possible to write off only the depreciation of fixed assets. That is, depreciation will be calculated not at the expense of expenses, but at the expense of retained earnings.
But, no one forces owners of enterprises to distribute undistributed profits without fail. If this relates to profit on the development of the enterprise, then:
- if the Charter of the enterprise provides that a special fund is created for this and there is a certain rate of deduction to this fund, then based on the decision of the meeting of participants in the enterprise, deductions to this fund are made due to retained earnings. In practice, this is very rare;
- in all other cases, this means that the founders of the enterprise can spend money on the acquisition of the necessary funds in the enterprise;
These purchases ultimately reduce the financial result and profit of the next reporting period. Such purchases will appear as recurring expenses.
How to reduce retained earnings?
This applies exclusively to the competence of the general meeting of participants in the enterprise. Only they can decide what to do with such income. They may also decide not to distribute profits.
1) One of the options for using retained earnings may be the payment of dividends. But again, the decision of the meeting of participants decides which part of the profits should be directed to the payment of dividends, or refuse such a payment at all.
2) Another option could be the creation of reserve capital. In this case, there are some peculiarities, because reserve capital can only be used in the following cases:
- covering losses of an enterprise;
- payment of dividends on preferred shares;
- in other cases provided by law.
Reserve capital is like money deferred for a rainy day and is not used by everyday activities.
3) The third option for using retained earnings is to direct it to increase the authorized capital of the enterprise.
4) Retained earnings, by decision of the meeting of participants in the enterprise, can be used to pay off losses of the enterprise.
Author: Kristina Vorozhbitova