Profits are an important part of a business so as its allocation. That is why the Profit and Loss Appropriation Account is an important part of an organization. Profit and Loss Appropriation Account is necessary for businesses, especially partnerships because they help to allocate the net of expenditures and incomes among the various partners.
It is a special account that a firm prepares to show the distribution of profits/losses among the partners or partner’s capital.
This account should not be confused with the typical Profit and Loss Account but rather seen as an extension of it as it is made after making the Profit and Loss Account.
Overall the firm uses it to show the allocation and distribution of Net Profit among the partners, reserves, and dividends.
Time of Creation
A firm prepares it after the preparation of profit and loss account at the end of every Financial Year, in short on 31st March every year. It is prepared just like many other ledger accounts.
It’s Debit items include:
- Net Loss transferred from P&L account,
- Transfer of profit to Reserves,
- Salary to Partners,
- Interest on Capital,
- Commission to Partners,
- Payments designated for dividend payments.
It’s Credit items include:
- Net Profit Transferred to the account from the Profit and Loss Account,
- Money was taken out from the general reserve,
- Drawing by the partners and the interest thereupon.
Balance of Profit and Loss Appropriation Account
The balance of the account (Credit – Debit) is transferred as the remaining profit either to the Capital accounts or to the Current accounts of the partners in their respective pre-decided profit distribution ratio or shares.
But in the case of deficiency of profits, adjust the allocation of profits to salary, commission, etc. keeping in view the availability of profit.