Similar to the Profit and Loss Account, Profit and Loss Appropriation Account is also a nominal account. This implies that the appropriation account is prepared by following the rule of nominal account,”Debit all expenses and losses and Credit all incomes and profits”.
This account is prepared after Profit and Loss Account. The Profit and Loss Appropriation Account is prepared primarily to show the appropriation (distribution) of profits among the partners. That is, in different words, this account shows how the net profit is distributed (appropriated) among all the partners of a partnership firm. The appropriation of net profit is done after considering all the relevant adjustments such as interest on partners’ capitals, interest on drawings, partners’ salary and commissions, etc.
Features of Profit and Loss Appropriation Account
- It is an extension of Profit and Loss Account.
- It is prepared to show how the profit available for appropriation has been appropriated among different items such as interest on capitals, partners’ remunerations in the form of salary, commissions, etc. It is nominal account in nature.
- In case of partnership firms, the items of profit due to the partners such as interest on capitals, partners’ remunerations in the form of salary, commissions, are debited and the items due from partners such as interest on partners’ drawings, net profit are credited to the Profit and Loss Appropriation Account.
Relationship between Profit and Loss Account and Profit and Loss Appropriation Account
The following points highlight the relationship between the two accounts.
Profit and Loss Account is prepared to ascertain the amount of net profit after considering all the expenses and incomes of a firm. On the other hand, Profit and Loss Appropriation Account is prepared to show how the net profit so ascertained is distributed among all the partners of the firm.
Profit and Loss Appropriation Account is prepared after Profit and Loss Account. The appropriation account is prepared using the net profit (or net loss) revealed by the Profit and Loss Account. Thus, in this sense Profit and Loss Appropriation Account is regarded as an extension of Profit and Loss Account.
Steps to Prepare Profit and Loss Appropriation Account
The following are the steps to prepare the Profit and Loss Appropriation Account.
Step 1: Show Net Profit on the credit side of the Profit and Loss Appropriation Account. If Net Loss is given, then it is shown on the debit side of the account.
Step 2: The items such as Interest on Partners’ Capitals, Partners’ Salary, Partners’ Commissions, Bonus to the Partners, profit transferred to reserves, etc. are shown on the debit side of the Profit and Loss Appropriation Account.
Step 3: If Interest on Partners’ Drawings is given, then it is shown on the credit side of the account.
Step 4: Finally, both the sides are totaled. If the total of the debit side exceeds that of the credit side, then the difference amount is shown on the credit side of the account as ‘Loss transferred to Partners’ Capital Accounts’. On the contrary, if the total of the credit side exceeds that of the debit side, then the difference amount is shown on the debit side of the account as ‘Profit transferred to Partners’ Capital Accounts’.
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