What Is Undivided Profit?
Let me explain undivided profit directly: it's the gains from current and past years that haven't been shifted to a surplus account or handed out as dividends to shareholders. You see, financial gains or budget surpluses often get parked in a separate surplus account, set aside for dividends, or directed toward something like funding a project.
In essence, undivided profit is about corporate earnings that build up over time instead of being spent on other things. I want you to think of it as money that's staying put in the company for now.
Key Takeaways
To break it down, undivided profits cover those gains not transferred to surplus or distributed as dividends. Current earnings might go into this account, and eventually, they'll either become dividends for shareholders or stay as retained earnings inside the company. You can also view undivided profit as the overall profits a company reinvests back into itself.
Understanding Undivided Profit
Current earnings can land in the undivided profits account, and from there, they might go out as dividends or remain as retained earnings. Paying dividends shows the company is financially solid, while keeping earnings can fuel future expansion. The right approach depends on how much profit there is and what projects could maximize value.
Typically, undivided profit shows a public company's after-tax earnings. Unlike funds in a surplus account, which are earmarked for dividends until transferred, undivided profits aren't committed that way yet, so they count as part of the company's equity. Think of it as profits reinvested into the company when not paid out.
This difference between a bank's undivided profits and its surplus was nailed down by the U.S. Supreme Court in 1925 in Edwards v. Douglas. The ruling put it this way: banks use 'undivided profits' for profits carried temporarily, versus 'surplus' for amounts treated as permanent capital, which might come from stock payments above par or profits dedicated to capital use.
Example of Undivided Profit
Back in 1964, the Federal Reserve Bank of Dallas tackled whether undivided profits should count as part of a bank's capital or surplus. After reviewing the Supreme Court ruling, the bank's president stated the Board's view: undivided profits don't qualify as 'capital,' 'capital stock,' or 'surplus' under the Federal Reserve Act. This affects limits on things like loans to affiliates, investment securities purchases, bank premises investments, stock or bond collateral loans, deposits with nonmember banks, and bank acceptances, among others.
Other articles for you
This text explains what trust funds are, how they work, their types, and key considerations for estate planning.
This text explains the fundamentals of supply chains, from components and models to best practices and impacts like COVID-19.
A feeder fund pools investor capital into a master fund for efficient management and cost reduction.
A junior mortgage is a secondary loan on a property that ranks below the primary mortgage in priority during foreclosure.
Voluntary foreclosure is a borrower-initiated process to surrender a property and avoid lender-enforced foreclosure when payments become unaffordable.
An economic growth rate measures the percentage change in a nation's production of goods and services over a specific period compared to a previous one.
Joseph Stiglitz is a Nobel Prize-winning economist renowned for his contributions to information economics, risk aversion, and monopolistic competition.
The waterfall concept is an estate planning strategy using whole life insurance to transfer wealth tax-efficiently from older to younger generations.
A junior accountant is an entry-level role focused on maintaining financial records and reports under supervision, requiring a bachelor's degree and offering career advancement opportunities.
Unlevered free cash flow (UFCF) measures a company's available cash before interest payments, highlighting its operational cash generation potential.