What is the relationship between distributable profits and retained earnings?

Distributable profits are a subset of retained earnings that represent the portion of accumulated profits that a company can legally distribute to shareholders as dividends. Retained earnings, on the other hand, encompass all profits that a company has retained or reinvested over time, including those that are not available for distribution.

The key point is that while retained earnings include all profits accumulated over the years, distributable profits consider the legal framework and other factors like previous losses that limit the amount available for dividends. Generally, the balance of retained earnings would equal or exceed the amount defined as distributable profits, reflecting the profits that are available for distribution after considering statutory requirements, potential reserves, and retained earnings from previous periods.

This understanding clarifies why the second option is correct: in most cases, distributable profits are equal to retained earnings, provided that there are no restrictions imposed on the profits made by the company. Thus, recognizing this relationship is crucial for shareholders and management when making decisions about dividend payments and the financial strategy of the company.