Difference between Profit and Loss Account And Profit and Loss Appropriation Account
In the words of Prof. Carter “A Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice-versa.”
Profit and Loss Account is prepared by every organisation to know about the profit earned and loss incurred by the organisation in a financial year. It is prepared after the Trading and Profit and Loss Account, and helps to determine the Net Profit and Net Loss during an accounting year. It is debited with expenses and credited with income. It starts with Gross Profit on the credit side and in case of Gross Loss, it starts with Gross Loss on the debit side. It is the second stage in the preparation of final accounts and the Accrual basis of accounting is followed in the preparation of this account. It helps in preparing the Balance Sheet and comparison with the previous year’s profit.
Profit and Loss Appropriation Account is prepared by a partnership firm to appropriate the net profit of the accounting year among the partners. Profit and Loss Appropriation Account is affected by the Partnership Deed or the Partnership Act. It is an extension of the Profit and Loss Account, and the items debited to the Profit and Loss Appropriation Account are not a charge against profit.
Profit and Loss Appropriation Account is credited with the net profit of the accounting year. The items debited and credited in this account are treated as appropriations of profit, and not a charge against profit. Net profit and Interest on drawings of the partners are credited, and Interest on capital of the partners, Partners’ Salary and Commission are debited to the Profit and Loss Appropriation Account. On the agreement between partners, a part of the profit may be transferred to Reserve. The profit left behind after the appropriation among the partners is distributed among the partners in the profit-sharing ratio.
Difference between Profit and Loss Account And Profit and Loss Appropriation Account:
Profit and Loss Account
Profit and Loss Appropriation Account
|Basis||Profit and Loss Account is not prepared on the basis of Partnership Deed, except for interest on loan from partners.||Profit and Loss Appropriation Account is prepared on the basis of the Partnership Deed.|
|Principle||Profit and Loss Account follows matching principle, i.e., matching revenue against expenses.||Profit and Loss Appropriation Account does not follow matching principle.|
|Recordings||Items debited to Profit and Loss Account is charge against profit.||Items debited to Profit and Loss Appropriation Account is appropriation of profit.|
|Need to Prepare the Account||Profit and Loss Account is prepared to ascertain the net profit or net loss of the organization for the accounting year.||Profit and Loss Appropriation Account is prepared to appropriate the net profit.|
|Prepared After||Profit and Loss Account is prepared after trading account.||Profit and Loss Appropriation Account is prepared after Profit and Loss Account.|