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Profit distribution

In one sentenceTransferring part of the distributable profits to partners or shareholders in cash or in shares, by a decision of the competent body in the company.

Simply put

Before distribution, the distributable profit is calculated: net profit after Zakat or tax, minus what the company's contract or bylaws require to be set aside as a reserve. The rest is then divided by ownership percentages or the agreed percentages.

For accounting: when the decision is made, retained earnings are reduced and a dividends payable liability is recorded, and on payment the liability is settled. The distribution does not appear as an expense in the income statement.

Worked example

A limited liability company between two partners at 60% and 40% has net profit after Zakat of 300,000 SAR. Its contract requires setting aside 10% as a reserve (a hypothetical rate for illustration), and the two partners decided to distribute the rest.

Reserve: 300,000 × 10%30,000 SAR
Distributable: 300,000 − 30,000270,000 SAR
First partner's share: 270,000 × 60%162,000 SAR
Second partner's share: 270,000 × 40%108,000 SAR
Total distributed to the two partners270,000 SAR

Formula: Partner's share = (net profit − reserve set aside) × their ownership percentage

Don't confuse it with

Dividend payout ratioThe payout ratio is an analytical indicator that divides the amount distributed by net profit, while profit distribution is the decision and the process itself.