The balance sheet shows the limit of what dividends can be drawn:

This is made up of the following sections:

  • Fixed assets
  • Current assets
  • Current liabilities
  • Net current assets (or liabilities)
  • Long term liabilities

Which is made up by the reserves (a limited company in our example)

  • Share capital – usually the funds invested in the company when it started up
  • Retained reserves – the profits which have built up over the years
  • Profit for the year – this year’s profit which will increase reserves further
  • It is the latter profit and reserves from which dividends can be paid, and take earlier rather than later to avoid the dividend tax
  • You should leave some funds in reserves to make sure the business can still run

This is a brief short explanation of the Balance sheet and in particular what reserves are available to pay a dividend from.  Every business is different so you should therefore seek professional advice before taking any steps based on the contents. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”