What Is Undivided Profit?

Undivided profits refer to gains from current and past years that have not been transferred to a surplus account or distributed as dividends to shareholders. Often times, financial gains or budget surpluses are set aside in a separate account designated as a surplus account, are earmarked for distribution as dividends, or assigned to another purpose such as funding a project. 

Essentially, undivided profit refers to corporate earnings that have been allowed to accumulate over a period of time as opposed to being disbursed for other purposes.

Key Takeaways

  • Undivided profits refer to gains from current and past years that have not been transferred to a surplus account or distributed as dividends to shareholders.
  • Current earnings may be credited to the undivided profits account and will eventually either be distributed to shareholders in the form of dividends or will be held within the company in the form of retained earnings.
  • Undivided profit can also be thought of as a company's overall profits that are re-invested into the company.

Understanding Undivided Profit

Current earnings may be credited to the undivided profits account and will eventually either be distributed to shareholders in the form of dividends or will be held within the company in the form of retained earnings. Dividend distributions signal strong financial strength within the company while retained earnings can be used to further future growth. The desired strategy may depend on the amount of profit generated and the potential for value-maximizing projects.

Undivided profit typically reflects a public company's earnings after tax. Since undivided profits are not earmarked for dividends like funds in a surplus account are, at least until they are transferred to a surplus account, they are counted as part of the company's equity. Undivided profit can also be thought of as a company's overall profits that are re-invested into the company (when not given as dividends).

This distinction between a bank's undivided profits account and its surplus or surplus fund account was explicitly recognized by the United States Supreme Court in 1925, with Edwards v. Douglas. The ruling stated: “By incorporated banks, the term (undivided profits) is commonly employed to designate the account in which profits are carried more or less temporarily, in contradistinction to the account called surplus in which are carried amounts treated as permanent capital, and which may have been derived from payments for stock in excess of par, or from profits which have been definitely devoted to using as capital.”

Example of Undivided Profit

The question of whether undivided profits counted as part of the capital or surplus of banks came up in 1964 with the Federal Reserve Bank of Dallas, which debated how to count this allocation of money.

After examining the Supreme Court ruling, the then-president of the Federal Reserve Bank of Dallas stated that it was of the Board’s opinion that "undivided profits do not constitute 'capital,' 'capital stock,' or 'surplus' for the purposes of provisions of the Federal Reserve Act, including those that limit member banks with respect to loans to affiliates, purchases of investment securities, investments in bank premises, loans on stock or bond collateral, deposits with nonmember banks, and bank acceptances, among others."