Noddy accountancy question

[martinb]

You will have been trading whilst insolvent. You may not pay dividends out of expected future income, you can only pay from funds that you already have.

So, when this unexpected cost comes in, you should be all square. You then stop paying dividends until you can meet it. The state of not making enough to cover dividends already paid should not occur.

tim

The trouble is, that funds is not equal to profit. Its perfectly feasible to have plenty of cash in the bank (and therefore "funds that you already have") but that doesn't mean you're going to make a profit or that you have any retained earnings from which to pay dividends.

The "state of not making enough to cover dividends already paid" CAN occur if there is an unexpectedly large bill that reduces profits to an amount lower than dividends already drawn.