Appropriation Account
Displays the distribution of funds by businesses and the government.
Appropriation accounts display the distribution of funds by businesses and the government. In general accounting and partnerships, limited liability corporations typically create such accounts.
One of the major appropriation accounts commonly prepared in accounting for companies is the Profit and Loss Appropriation Account, which is slightly different from the typical Profit and Loss account.
A profit and loss account calculates the organization's net profit or loss for the fiscal year. Then, the net profit is ready to be appropriated in the profit and loss account appropriation account.
This account clearly shows how a firm's partners allocated profits and losses. Demonstrating how Net Profit is distributed among partners, reserves, and dividends are profit and loss appropriation objectives.
Some transactions are considered appropriation and represented in the account, such as interest on capital, interest on drawings, salary to partners, commission to partners, and division of distributable profits.
Some of the features of preparing this account are:
- Prepared after preparation of profit and loss account
- Prepared by partnership firms
- Considered to be a nominal account
- Shows the division or allocation of the distributable profits to the firm's partners.
- While preparing this account, you must follow the partnership obligations.
Some items not considered a part of this account, such as:
- Interest on loans for partners
- Rent to partners on the property
- Commission to the managers
The companies can track and discover the distribution of profits using this account. In addition, it helps in formalizing the partnership distributions, reducing the probability of disagreement in the firm.
Governments can forecast their budgets for upcoming years by tracking how money is allocated and used in each department.
The fiscal budget is also significantly influenced by the government's appropriation account, which details the amount and purpose of funds needed for the upcoming fiscal year.
Format
This account's main aim is to distribute the company's profits to the shareholders and recognize the retained part of the profits for the next accounting year.
The difference between a profit and loss account and a profit and loss appropriation account are:
| Basics | Profit and Loss account | Profit and Loss Appropriation account |
|---|---|---|
| Begins with | This account begins with the gross profit from the trading account | This account starts with net profit from the profit and loss account |
| Purpose | To analyze and measure the net profit of the organization | To distribute the share of profits to the partners of the firm |
| Partnership agreement | Not based on a partnership agreement | Based on a partnership agreement |
| Prepared by | It is prepared by all forms of organizations, like sole proprietorships, partnerships, and companies. | It is mainly prepared by partnerships only. |
| Prepared after | It is prepared after the Trading account | It is prepared after the Profit and Loss account |
| Matching principle | During preparing this account, the matching principle is followed | No matching principle is followed for preparing this account. |
This account is the format companies must follow while preparing their financial statements and appropriation accounts.
The following items are debited while preparing these accounts:
- Interest on capital
- Salary to the partners
- Commission to the partners
- Reserves payments
- Dividend payments
- Transfer of the distributable profits
The following items are credited while preparing these accounts:
- Net profit transferred from Profit and Loss account
- Interest on drawings
Profit and Loss Appropriation Account for the year ended 31st March 2022
| Particulars | Debit ($) | Particulars | Credit ($) |
|---|---|---|---|
| Interest on capital: | Net Profit (P&L Account) | XXX | |
| Partner A | XX | Interest on drawings: | |
| Partner B | XX | Partner A | XX |
| Salary to partners: | Partner B | XX | |
| Partner A | XX | ||
| Partner B | XX | ||
| Commission to partners | |||
| Partner A | XX | ||
| Partner B | XX | ||
| Share of profits: | |||
| Partner A | XX | ||
| Partner B | XX | ||
| TOTAL | XXX | TOTAL | XXX |
Examples
Company XYZ Ltd. collected a net profit of $3,000,000 for the year ended 31st March 2022.
| Particulars | Partner A | Partner B |
|---|---|---|
| Interest on capital | $500,000 | $350,000 |
| Salary | $200,000 | $150,000 |
| Commission to partners | $20,000 | $15,000 |
The partners also had to pay interest on drawings for $50,000 (partner A) and $60,000 (partner B). As a result, the profit-sharing ratio between the 2 partners is 1:1.
Profit and Loss Appropriation Account for the year ended 31st March 2022
| Particulars | Debit ($000) | Particulars | Credit ($000) |
|---|---|---|---|
| Interest on capital: | Net Profit (P&L Account) | 3,000 | |
| Partner A | 500 | Interest on drawings: | |
| Partner B | 350 | Partner A | 50 |
| Salary to partners: | Partner B | 60 | |
| Partner A | 200 | ||
| Partner B | 150 | ||
| Commission to partners | |||
| Partner A | 20 | ||
| Partner B | 15 | ||
| Share of profits (1:1): | |||
| Partner A | 937.5 | ||
| Partner B | 937.5 | ||
| TOTAL | 3,110 | TOTAL | 3,110 |
As the profit-sharing ratio is 1:1, the partners equally shared the distributable profits with $938,000 (approx.) each for the year ended 31st March 2022.
- These accounts represent the distribution or allocation of the distributable profits among the partners in the specified profit-sharing ratio given by the company.
- One of the principal appropriation accounts is the profit and loss appropriation account which includes interest on capital and drawings, commission and salary to partners, and interest on drawings.
- The distributable profits from this account are divided among the partners in a specified profit-sharing ratio.
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