Co-operation · Ch 5 — Accounts and Audit of Co-operative Societies
Distribution of Profits (Reserve Fund, Dividend and Bonus)
Distribution of Profits (Reserve Fund, Dividend and Bonus)
When a co-operative society earns a surplus, it cannot hand out the whole of it as it pleases. Because a co-operative works for service and stability rather than for maximum profit, the Act, the Rules and the society's bye-laws lay down a fixed order in which the net profit must be appropriated. The general body finally approves this appropriation, but always within these legal limits.
Step 1 — Arriving at the net profit. The net profit is what remains after charging against income all the society's working expenses, interest on deposits and borrowings, depreciation on assets, provision for bad and doubtful debts, and all other proper charges. Only this genuine surplus is available for distribution.
Step 2 — Compulsory transfer to the Reserve Fund. Before anything else, the Act requires the society to carry at least one-fourth (25%) of its net profit to the Reserve Fund. The reserve fund belongs to the society as a whole (not to individual members); it strengthens the society's finances and is a cushion against future losses. This transfer comes first and is not optional.
Step 3 — Contribution to the Education Fund. A prescribed contribution is made to the co-operative education fund maintained by the state co-operative federation, so that the profits of the movement help spread co-operative education and training.
Step 4 — Appropriations from the balance (with sanction). From the profit that remains, and subject to the Rules, the bye-laws and the general body's decision, the society may:
| Appropriation | Nature |
|---|---|
| Dividend on shares | A return paid to members on their paid-up share capital, at a limited rate fixed by the bye-laws within the ceiling allowed by the Rules |
| Bonus to members | A share of profit distributed to members in proportion to the business each has done with the society (their patronage), not to their shareholding |
| Other funds | Contributions to a bad-debts fund, dividend-equalisation fund, building fund, staff welfare or charitable fund |
| Carry forward | Any undistributed balance carried to the next year's account |
Dividend vs. Bonus — A Key Distinction
Dividend rewards a member for the capital he has invested — it is paid on his shares at a limited rate. Bonus rewards a member for the use he has made of the society — it is paid in proportion to the business he has transacted with it. A member who holds many shares but does little business gets more dividend but less bonus; a member who does much business but holds few shares gets little dividend but more bonus. This is co-operation's way of rewarding patronage, not merely wealth. …
The surplus remaining with a society after charging all working expenses, interest, depreciation and provisions against its income; only this amount is available for statutory …
A fund built up by compulsorily transferring at least one-fourth (25%) of net profit each year; it belongs to the society as a whole, strengthens its finance …
A limited return paid to members on their paid-up share capital, at a rate fixed by the bye-laws within the ceiling pe …
A share of profit distributed to members in proportion to the business (patronage) each has done with the society, as distinct from dividend, whic …