WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Accounting Tutorials » Bookkeeping Tutorials » Appropriation Account

Appropriation Account

Appropriation Account Definition

An appropriation account shows how we divide the firm’s Net profit, i.e., how much is used to pay income tax, how much is paid as a dividend to shareholders, and how much is set aside as retained earnings. It is mainly prepared by the partnership firm, Limited liability Company (LLC), and government. Here we will discuss the Profit and loss appropriation account prepared by Partnership firms. Appropriations are made only when there are profits.

How does Appropriation Account Works?

The appropriation account is prepared after preparing Profit & Loss A/c. In the case of partnership firms, it is prepared to show how profits are distributed among the partners involved in the partnership.

In the case of LLC, the purpose of preparing this account is the same, but the format is different. We will start with the profit of the year before the taxation figure from which we will subtract corporate taxes and dividends to find the retained earnings for the year.

In the case of government, the appropriation account is used to show the funds allocated to a specific project. Any expenses are reduced from the funds allocated.

Appropriation Account

Profit and Loss (P&L) Appropriation Account

P&L Appropriation Account is prepared to show how the company appropriates or distributes the profit earned during the year. It is an extension of Profit and loss a/c. It is prepared after the preparation of profit and loss a/c at the end of every financial year.

Popular Course in this category
Sale
Bookkeeping Course
4.5 (241 ratings)
1 Online Courses | 3+ Hours | Verifiable Certificate of Completion | Lifetime Access
View Course

The purpose is to allow the adjustments to be made to the profits so that the final income can be divided among the partners as per the agreed terms.

It is a nominal account, which means all the expense items of the firm are debited, and income items are credited.

Format of Profit and Loss (P&L) Appropriation Account

Below is the format of the profit and loss appropriation account.

Appropriation Account Format

Following are the adjustments/items included in this account:

  • Net Profit: This is the opening balance of appropriation a/c. This balance is taken from Profit & Loss a/c after making all the necessary adjustments for the period.
  • Interest on Capital: It is the expense for the company as a partner will be paid interest on the amount of capital invested in the business.
  • Interest on Drawings: It is an income for the company. The company will charge interest from the partner on any amount of capital withdrawn during the year.
  • Partner’s Salary: It is pre-agreed as per the partnership deed and is an expense for the business.
  • Partner’s Commission: It is pre-agreed as per the partnership deed and is an expense for the business.
  • Net Profit transferred to Partner’s Account: This is the final profit amount after making all the above adjustments.

Example of Profit & Loss (P&L) Appropriation A/c

A & B started a partnership firm on 01.01.2017. They contributed $50,000 each as their capital. The terms of a partnership are as under:

  1. A& B to get monthly salary of $1,000 & $1,500 respectively
  2. B is allowed a commission at the rate of 5% of Net profit
  • Interest on capital & drawings will be 10% p.a.
  1. Sharing of profit & Loss will be in the ratio of capital sharing.

The profit for the year ending 31.12.2018, before making the above appropriations, is $75,000. Drawings of A & B were $10,000 & $20,000 respectively. Prepare Profit & Loss Appropriation Account.

Solution

Appropriation Account Example

Working

WN 1 Interest on Capital @10% of the Capital Invested

  • Partner A  = 50000*10% = 5000
  • Partner B = 50000*10% = 5000

WN2 Commission @5% of Net Profits

  • Partner B = 75000*10% = 3750

WN3 Interest  on Drawings @ 10% of Amount of Drawings

  • Partner A  = 10000*10% = 1000
  • Partner B = 20000*10% = 2000

WN4 Net Profit divided among partners in ratio of their capital i.e 50% each

Partner A  = (78000-(5000+5000+12000+18000+3750))/2

  =17125

Partner B =(78000-(5000+5000+12000+18000+3750))/2

 =17125

Importance of Appropriation Account

  • This account shows the number of profits which can be divided among various heads.
  • It shows the number of profits transferred to reserves, distributed as dividends.
  • It gives information on how the profits are divided among partners and how the various adjustments are made during the year;

Conclusion

Hence, the appropriation account is used to show how the profits are appropriated or distributed among various heads. This account is prepared on behalf of the firm.

Recommended Articles

This article has been a guide to the Appropriation Account. Here we discuss the format of profit and loss (P&L) appropriation account along with an example and detailed explanation. You can learn more about financing from the following articles –

  • Share Trading Account
  • Extension Lease
  • Reserves and Surplus
  • Profit Before Tax Definition
10 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

New Year Offer - Bookkeeping Course View More