Rules for Distributing Reserves in Accounting

Steps:

• Identify capital reserves as non-distributable funds like share premium or revaluation surplus.
• Identify revenue reserves as distributable profits like retained earnings.
• Recall that dividends require profits, so only revenue reserves qualify.
• Note bonus shares capitalize free reserves, typically revenue-based, not capital.

Why C is correct:

• Under company law (e.g., Companies Act), dividends must come from current or past profits in revenue reserves; capital reserves protect capital and cannot fund dividends.

Why the others are wrong:

• A: Correct—bonus shares require free reserves from profits, excluding capital reserves to preserve capital base.
• B: Correct—revenue reserves like general reserve can fund bonus shares as they represent accumulated profits.
• D: Correct—dividends are legally payable from revenue reserves, ensuring distributions from earnings only.

Final answer: C