Profit And Loss Appropriation Account – Basic College Accounting

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.

The net profit will be the figure entered in the profit and loss account

There needs to be a tax payable account created for corporation.(Dr:P&L Appropriation Cr: Corporation Tax Payable

Transfers to reserves will be added to any existing amounts in these reserve account resulting in an increased total being shown

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

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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