Profit generation
The process of summing up profits and losses received from operations is called profit formation. Such operations include:
- sales of products;
- activities related to investment;
- non-operating operations,
- sale of the company's fixed assets.
Profit is generated from various sources, the main of which is sales volume, defined as the difference between sales income and the accompanying costs. The amount of profit depends on:
- sales volume;
- product price levels;
- correspondence of the level of costs to the costs incurred.
Sales volume, in turn, depends on competent commercial activity, creating conditions for sales, organizing advertising, successful pricing policy, and commodity production. The optimal level of costs is characteristic of the correct organization of labor, production technology, and technical equipment.
Not the last place in the formation of profit is played by the innovative activity of the enterprise. It ensures the renewal of manufactured competitive products, growth in sales volumes and, accordingly, profits.
Economic essence and functions of profit.
In general terms, profit refers to the difference between income and production costs.
At the enterprise level, in the conditions of commodity-money relations, net income takes the form of profit. In the goods market, enterprises act as relatively isolated commodity producers. Having set the price for the product, they sell it to the consumer, receiving cash proceeds, which does not mean making a profit. To identify the financial result, it is necessary to compare revenue with production and sales costs, which take the form of production costs. When revenue exceeds cost, the financial result indicates a profit. An entrepreneur always sets profit as his goal, but does not always receive it. If revenue is equal to cost, then it was only possible to reimburse the costs of production and sales of products. When selling without losses, there is no profit as a source of production, scientific, technical and social development. When costs exceed revenue, the company receives losses - a negative financial result, which puts the company in a rather difficult financial situation, which does not exclude bankruptcy.
Profit (loss) from the sale of products (works, services) is defined as the difference between the proceeds from the sale of products (works, services) without value added tax and excise taxes and production and sales costs included in the cost of products (works, services).
From the above definition it follows that its origin is associated with the receipt of gross income by an enterprise from the sale of its products (works, services) at prices determined on the basis of supply and demand. Gross income of an enterprise - proceeds from the sale of products (works, services) minus material costs - is a form of net production of the enterprise, includes wages and profit. The connection between them is shown in Fig. 1.
This means that the more a company sells profitable products, the more profit it will receive, and the better its financial condition. Therefore, financial performance results should be studied in close connection with the use and sale of products.
Profit, as the most important category of market relations, performs certain functions.
Firstly, it characterizes the economic effect obtained as a result of the enterprise’s activities.
Secondly, profit has a stimulating function. Its content is that it is both a financial result and the main element of the financial resources of the enterprise. The actual provision of the principle of self-financing is determined by the profit received.
Thirdly, profit is one of the sources for the formation of budgets at different levels.
In practical terms, profit is a general indicator of the results of economic activity of enterprises of any form of ownership.
There are accounting and economic profits.
Economic profit is the difference between revenue and all production costs (external and internal).
In an accounting sense, profit is the difference between total revenue and external costs.
In accounting practice, the following profit indicators are distinguished and used in the process of analyzing business activities: balance sheet profit, profit from sales of products, works and services, profit from other sales, financial results from non-operating transactions, taxable profit, net profit.
Enterprise profit distribution
In a competitive environment, any company not only strives to obtain maximum profit, but also to such a volume that it will make it possible to maintain an acceptable position in the sales market and purposefully develop production. Therefore, it is equally important to correctly distribute profits by correctly implementing the policy of encouraging and generating your own resources.
When distributing profits, companies take into account the state of the market environment, which dictates the need to expand the company's production capacity. Based on this factor, the scale of contributions to funds intended to finance capital investments, increase current assets, introduce new technologies and labor methods, provide R&D, etc. is determined.
The procedure for distribution and use of profits
The company uses the profit received in accordance with current legislation and the provisions enshrined in the constituent documents, adhering to the following profit distribution scheme:
- all taxes and obligatory payments to the budget (for profit, land, vehicles, rental, etc.) are paid from the generated profit;
- from the profit (net) remaining at the disposal of the company, funds are transferred to accumulation and consumption funds (reserve, investment, production development, dividend, social development, material incentives and others provided for by the charter or constituent documents). The standards for contributions to the funds are established by the company with prior agreement with the founders.
With all the variety of approaches to profit distribution, all enterprises are characterized by the same principles of profit distribution - its direction:
- for accumulation, i.e., development of the company (formation and replenishment of reserve and investment funds, investment in management companies of other companies, financial investments for different periods). This part of the profit is reflected in the undistributed block and forms funds;
- for consumption, i.e. distributed profit (payment of dividends, provision of social and material support for personnel, acquisition of shares, etc.)
Thus, profit distribution is a way to implement the developed dividend policy and the policy of forming the company’s own resources.
Distribution and use of enterprise profits
The legislator regulates the distribution of profits in terms of tax revenues to budgets. Determining other areas for spending the remaining part of the profit is the prerogative of the company. The procedure for the distribution and use of profits is necessarily recorded in the constituent documents and approved by the head of the company.
Standards for the distribution of profits are not stipulated by the legislator, but a certain influence, for example, through tax breaks, stimulates the use of profits for capital investments, innovations, charity and other purposes. The legislator limits the size of the reserve fund and regulates the procedure for forming a reserve for doubtful debts. Let's consider some aspects of profit distribution in companies of different organizational and legal forms.
Distribution procedure in LLC
If the procedure for dividing profits for an LLC is allowed, it is usually distributed in proportion to the share of each participant in the authorized capital. In some cases, prescribed in the charter of an LLC, the financial result is divided disproportionately between the owners.
The formation and distribution of profit of an enterprise where the owner is one person occurs according to a certain scheme. This does not require a meeting. In this case, the owner of the LLC makes the decision independently. This procedure must be documented. The founder confirms his decision with a signature.
Distribution of profits in LLCs and JSCs
LLC participants have the right to distribute profits or losses received in accordance with Law No. 14-FZ dated 02/08/1998. The net profit of the LLC is distributed by the general meeting of participants, but it does not have the right to make decisions if:
- the management company has not paid;
- the participant's share or part thereof has not been paid;
- there are signs of company insolvency;
- if the value of the LLC's net assets is less than the capital and reserve fund.
The main issues when distributing profits in an LLC may be the following:
- increase in the MC with a proportional increase in the share of participants;
- repayment of losses from previous years;
- dividend payment.
It is possible to increase the authorized capital only after full payment and when such a decision is made by 2/3 of the votes. The part of the profit distributed for the payment of dividends is divided among the participants in proportion to their shares in the management company, unless the charter establishes a different distribution algorithm.
An example of dividend distribution in Dom LLC
The company's participants are three domestic companies with a separate management company:
- LLC "A" - 10%;
- LLC "B" - 40%;
- LLC "V" - 50%.
The charter of Dom LLC states that profits are distributed equally between the participants. According to the decision of the meeting dated March 28, 2018, the net profit for 2021 is in the amount of 900,000 rubles. subject to distribution among participants.
Since the distribution of dividends is carried out not proportionally, but equally, each participant is entitled to 300,000 rubles. (900,000 / 3) less tax. If it were carried out in proportion to the shares in the capital company, then the calculation would be as follows:
– LLC “A” - 90,000 rubles. (900,000 x 10%);
– LLC “B” - 360,000 rubles. (900,000 x 40%);
– LLC “V” - 450,000 rubles. (900,000 x 50%).
The procedure for distributing profits in a joint-stock company is regulated by Law No. 208-FZ dated December 26, 1995. According to it, the joint-stock company uses net profit to create funds (including a special fund for the corporatization of employees), increase the authorized capital (by placing additional shares or increasing their value), and paying dividends. Making a decision on the direction of profit of a joint-stock company is the competence of the general meeting of shareholders.
The distribution of dividends is carried out on the basis of the announcement of their payment on outstanding shares, usually accepted based on the results of each quarter. However, the amount of dividends cannot be greater than the amount recommended by the board of directors. A JSC cannot declare the payment of dividends on shares if:
- the management company has not paid;
- shares have not been fully repurchased;
- there are signs of insolvency;
- The value of the LLC's net assets is less than the charter capital and the reserve fund.
The JSC is obliged to create a reserve fund, forming it with mandatory annual contributions (at least 5% of net profit) up to the amount provided for by the charter (at least 5% of the authorized capital).
Example of contributions to the reserve fund of Trio JSC
The JSC received a net profit for 2021 in the amount of RUB 900,000. The authorized capital is 2,000,000 rubles, the reserve fund as of 01/01/2017 was 80,000 rubles. The charter of the joint-stock company establishes the percentage of deductions - 7% of the capital up to the amount of 140,000 rubles. (2,000,000 x 7%).
The amount of deductions should be 63,000 rubles. (900,000 x 7%), but the total amount of the reserve will be 143,000 rubles. (80,000 + 63,000), i.e. it will exceed the maximum reserve size by 3 thousand rubles. (143,000 – 140,000). Therefore, the amount of 60,000 rubles will be allocated to replenish the fund.
How can net profit be distributed?
Net profit (hereinafter referred to as PE) is profit after paying all taxes and other obligatory payments.
The owners of the company have the right to distribute it. To do this, a general meeting is held, a protocol is drawn up and a decision is made on the distribution of net profit. Possible directions for distribution of private equity must be specified in the company's charter. It is also necessary to fix the timing of distribution and the amount of allocated profit - this can be a clearly defined percentage of undistributed profit or an indication that the amount will be determined when a decision is made.
The distribution of profits in LLCs and JSCs has its own characteristics. Which ones exactly, ConsultantPlus experts explained in detail. Full trial access to K+ is available for free. If you distribute profits in an LLC, this Ready Solution will help you, and if you are a JSC, then this material will help you.
Based on the decision of the founders, the state of emergency can be directed to:
- Dividend payments are the most common method of distributing PE. Restrictions on the accrual and payment of dividends are specified in Art. 29 Federal Law dated December 8, 2008 No. 14-FZ “On Limited Liability Companies” and in Art. 43 Federal Law dated December 26, 1995 No. 208-FZ “On Joint-Stock Companies.”
For information on income tax on dividends, see the material “How to correctly calculate the tax on dividends?”
- Repayment of last year's losses.
- Increasing the authorized capital (AC).
The decision to increase the capital of an enterprise can be made only on the basis of annual reporting. After such a decision is made, it is necessary to register changes in the constituent documents. Based on the certificate of state registration of changes, the increase in the capital is reflected in the accounting of the enterprise.
- Creation or replenishment of reserve capital and other funds.
Based on paragraph 1 of Art. 35 of Law No. 208-FZ, joint-stock companies are required to create a reserve fund of at least 5% of the capital. Only LLCs have the right not to do this (Clause 1, Article 30 of Law No. 14-FZ).
Also, societies can create accumulation, consumption, social, charitable and other funds.
- Other goals.
Do you have any doubts about the distribution of net profit? Find the answer on our forum! For example, here you can find out what to do with accrued but not paid dividends.
