PROFIT AND LOSS APPROPRIATION ACCOUNT
In Partnership Firm, a trading Account and profit & loss account is prepared and the net profit/ loss arrived is further divided among the Partners in the Profit-Sharing Ratio. For the purpose of distribution of profit or Loss among the partners, a Profit and Loss Appropriation Account is prepared. It is prepared to provide a clear picture of how the profits or losses are distributed among the partners of the firm. The main purpose of profit and loss appropriation is to show the allocation and distribution of Net Profit among the partners, reserves, and dividends.
Importance of Profit and Loss Appropriation account
- An appropriation account gives the picturisation of how profits are being distributed.
- Profit and loss appropriation account leads to less conflicts in partners as it formalises profit distributions.
- It helps the Governments in tracking the allocation of funds and their use in each department helping them to make projections for budgets for further years.
Main objects of preparing Profit and Loss Appropriation Account
- It shows the interest on Capital, salaries or drawings of partners or how much profit is to be transferred to reserves of the organisations.
- The profit and Loss Appropriation account helps to show a clear distinction between the capital contribution of each partner and the changes thereafter
- Distribution of profits amongst the partners in their profit-sharing ratio.
Features of Profit and Loss Appropriation Account
The main features of the Profit and loss and Appropriation account are as follows:
- Only partnership firms prepare this type of account and it is prepared after the preparation of the profit and loss account
- It is prepared for the purpose of allocating a share of profits or losses among the partners.
- It is prepared on the basis of a partnership agreement entered between the partners of the organisation.
- Through this Profit and Loss appropriation account, the amount is transferred to the reserves of the organisation.
Format of Profit and Loss Appropriation account
|To Interest on Partners Capital A/c|
By Profit and Loss A/c
loss a/c )
|To Partners Salaries A/c||By Interest on Partners Drawings A/c|
|To Partners Commission A/c|
|To Reserve A/c|
|To profit transferred to Partners Capital A/c:|
Differentiation between profit and Loss account and Profit and Loss appropriation account
Major differences between the two accounts are as follows:
- The profit and loss account starts with gross profit or loss as it is prepared after the trading account is prepared. However, the profit and loss appropriation account starts with Net profit or Loss as it is prepared after the profit and loss account.
- The profit and loss account is prepared to determine the Net profit and loss of an organisation during a period while profit and loss appropriation is prepared to distribute net profits or losses of the year among the partners.
- The profit and loss appropriation account is prepared on the basis of the partnership agreement while the Profit and Loss account is not based on the partnership agreement.
- The profit and loss account is prepared by all types of organisations while the profit and loss appropriation account is prepared mostly by partnerships.