what is profit and loss appropriation account? why it is prepared?
Answers
Answer:
All adjustments like partner's salary,commission,bonus,interest on capital,loans,drawings and sharing of profits are passes through a separate account called Profit & Loss Appropriation Account. Thus, profit and loss Appropriation account is prepared to show how net profit is distributed among the partners.
Explanation:
Profit and loss appropriation account is prepared for distribution/allocation of profits among partners. It is made from firms perspective so things which are an expense to the firm are shown on the debit side and firms income is shown on the credit side.
Debit items include :
1. Net Loss transferred from Profit and Loss A/c
2. Interest on capital
3. Salaries/commission/remuneration to partners
4. Reserves
Balance on debit side is written as Profit.
Credit items include :
1. Net Profit transferred from Profit and Loss A/c
2. Interest on Drawings.
3. Money withdrawn from reserves
Balance on credit side is written as Loss.