Question

could you please define "distribution to owners"? Please analyze and provide examples of this type of transactions.

Answer 1

Distribution to owners as the name suggests, simply refer to the payments made to the owners out of the earnings of business in the form of dividends. This directly impacts the equity and assets of the business by reducing them. It is usually in the form of cash, though it can also be done in the form of other assets. If businesses do not retain or "plough back" the profits to be invested in business, they distribute it to shareholders who are the owners of the company. This distribution made is basically a return on the investments made by the owners in the company. Thus, it is one of the many ways in which they extract value from the company.

These distributions reflect in the Capital Account and do not form a part of the regular statement of profit and loss drawn by companies. Examples of these type of transactions are dividends out of the profits, distribution of assets of a company etc.

Sometimes, distributions made by companies of assets on account of liquidation or giving loans to shareholders having substantial interest in a concern, also attract the provisions of deemed dividend. However, the law governing such distribution must provide for the same.