Profit And Loss Appropriation Account

August 4th, 2007 /
The Profit And Loss Appropriation Account
 For A Sole Trader :

  • The net profit is the entitlement of the owner and it is accordingly added to capital. Any drawings are deducted from capital 
 However for a Limited Company, a typical Profit And Loss Appropriation Account will look like below:        

     Profit And Loss Appropriation Account for XYZ Limited Co.

Note   $
1 Net profit for the year  
  Less:  
2 Corporation Tax  
  Net Profit After Tax  
  Add:  
  Profit & loss account balance brought forward  
  Less:  
3 Transfer to General reserve  
4 Dividends: Preference  
                    Ordinary  
5 Profit And loss account balance carried forward  

Salient Points to note:

Don’t forget that the appropriation account forms part of the   accounting system so the dual aspect concept applies to it. 
1 The net profit will be the figure entered in the profit and loss account
2 There needs to be a tax payable account created for  corporation.(Dr:P&L Appropriation  Cr: Corporation Tax Payable
3 Transfers to reserves will be added to any existing amounts in these reserve account resulting in an increased total being shown
4 Dividend paid will result in a reduction in cash. Dividend proposed at the year end but as yet unpaid will need to be reflected in a current liability
5 Any unappropriated profit will be carried forward as a balance on the profit and loss account. It appears in the balance sheet at the end of the period, as part of reserves and will be carried forward as the opening balance on the appropriation account for the next period.
Illustration
    Question: A company, XYZ Ltd has a net profit of $500,000. A balance of $100,000 was carried forward from previous years. Corporation tax is expected to be $200,000. $50,000 is to be transferred to a general reserve; $160,000 is to be paid as an ordinary dividend and $50,000 as a preference dividend 

     Solution:         Profit And Loss Appropriation Account for XYZ Limited Co.

  $ $ $
Net profit for the year     500,000
Less:      
Corporation Tax     200,000
Net Profit After Tax     300,000
Add:      
Profit & loss account balance brought forward     100,000
Less:      
Transfer to General reserve   50,000  
Dividends: Preference 50,000    
                  Ordinary 160,000 210,000 260,000
Profit And loss account balance carried forward     140,000

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