Dividends must be paid out of which type of profits?

Dividends must be paid out of distributable profits, which refers to the portion of a company's retained earnings that can legally be distributed to shareholders. Distributable profits are typically derived from net profits after tax and exclude certain reserves and losses that the company may have incurred. This ensures that a company does not pay dividends if it has not made sufficient profits to justify the payout, thus protecting the interests of creditors and ensuring the company maintains sufficient capital for its operations.

Other terms such as accrued losses or operational profits do not accurately represent the funds available for dividend distribution. Accrued losses indicate that the company has incurred more expenses than revenues, which would inhibit the ability to distribute dividend payments. Similarly, while operational profits represent earnings from the core business activities, they do not take into account the overall financial position of the company, including reserves and retained earnings, which determine the actual capacity to distribute dividends. Accumulative profits suggests a total of profits over time but does not specifically address whether those profits are legally distributable or have already been authorized for dividends. Therefore, the concept of distributable profits is crucial as it encompasses the necessary legal and financial context for paying dividends.