Accounting Treatment For
Appropriation Of Profits

Appropriation of profit is allocating a portion of year's profits for some specific purpose and is shown in the profit and loss appropriation account.

An organization appropriates funds in order to delegate cash for the necessities of its business operations. This may occur for any of the functions of a business, including setting aside funds for employee salaries, research and development, dividends and all other uses of cash. In business use, may also be known as "capital allocation."

A potential investor, by getting a clear picture of how a company appropriates its funds, may have a better idea of how it manages cash. This is crucial in figuring out whether a company uses cash with the view to build shareholder value, or whether its frivolous use of cash may lead to destruction of shareholder value.

Profit and Loss Appropriation Account should not be confused with the profit and loss account, but is rather as an extension of profit and loss account. Whereas, the profit and loss account is more general in nature, the profit and loss appropriation account is more specific.

Profit and Loss Account reflects how much surplus funds a concern has at the end of a specific accounting period. These accounts do not necessarily provide a specific answer as to how funds will be delegated or spent. However, they do provide an idea of how much money may be available for distribution among partners or to be held in a reserve account until a precise decision has been made regarding allocation of the surplus. If no surplus exists, the statement indicates the losses for the accounting period.

Appropriation of profits refers to those adjustments that needs to be done from the net profits of the organization earned during a particular period. And Profit and Loss Appropriation Account reflects how profit transferred from the profit and loss account is assigned. Appropriations are generally placed into one of four broad categories: funds designated for distribution among the partners, capital reserves, reserves earmarked to increase capital structure and surplus funds to be carried into the next accounting period.

Journal Entries For Profit And Loss Appropriation Account:

1. For Providing Interest on Capital:

Interest on Capital A/C ...............................Dr.

          To Partner's Capital A/c

2. For Closing Interest on Capital A/C :

Profit and Loss Appropriation A/C.....................................Dr.

          To Interest On Capital A/c

3. For Salary or Commission etc payable to partners :

Partner's Salary /Commission A/C.....................................Dr.

          To Partner's Capital A/c

4. For Closing Salary / Commission A/C :

Profit and Loss Appropriation A/C.....................................Dr.

          To Partner's Salary / Commission A/c

5. For charging Interest on Drawings :

Partner's Capital A/C...............................Dr.

          To Interest On Drawings A/c

6. For Closing Interest on Drawing A/c:

Interest On Drawings A/c.....................Dr.

          To Profit and Loss Appropriation A/c

7. For Transferring a part of Profits to General Reserve:

Profit and Loss Appropriation Account...........................Dr.

          To General Reserve A/c

8. For Transferring Profits /Losses to partner's Capital A/c:

a) If Profit and Loss Appropriation A/C shows a credit balance:

Profit and Loss Appropriation A/C....................................Dr.

          To Partner's Capital A/c

b) If Profit and Loss Appropriation A/C shows a debit balance:

Partner's Capital A/C....................................Dr.

          To Profit and Loss Appropriation A/c