Appropriation of Profits

Appropriate

Meaning

Give or assign a resource to a particular person or cause
Setting aside money for a specific purpose

Synonyms

allocation
setting aside

Appropriation of Profits

A debit in a nominal account for ascertaining profits like the Trading and Profit and Loss account which represents a transfer of credit balance from to some other nominal account (holding profits kept aside) is said to be an appropriation of profits. Such accounts to which credit balances (profits) are transferred to are generally named reserve, provision or fund.

Even these transfers of profits would reduce the available profits, but not in the real sense.

Example

Creation of General Reserve.

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
—	—	Profit and Loss a/c To General Reserve a/c	Dr.	- -	50,000	50,000
—	—	[For the amount of reserve created out of profits.]		- -	50,000	50,000

Ledger Show

Dr	Profit and Loss a/c	Cr

Particulars

Amount

Particulars

Amount

...
...
To General Reserve a/c

50,000

Dr	General Reserve a/c	Cr

Particulars

Amount

Particulars

Amount

By Profit & Loss a/c

50,000

Profit and Loss account will have a credit balance when there are profits and a debit balance when there are losses. Transfer of profit i.e. credit balance from the profit and loss account to the General Reserve account will result in the General Reserve account being credited and the Profit and Loss account being debited.

Transfer of credit balance from one account to a second results in the second being credited, thereby increasing the credit balance in the second account.

Effect of appropriation on Profit

The appropriation of profits would reduce the available profits or increase the existing losses.

When there is no appropriation to General Reserve

Dr	Profit and Loss a/c	Cr

Particulars

Amount

Particulars

Amount

To Rent
To Salaries
To Interest
To Taxes
To Depreciation
To Net Profit

2,50,000
4,50,000
12,40,000
14,00,000
2,10,000
18,50,000

By Gross Profit

54,00,000

When profits have been appropriated to the general reserve

Dr	Profit and Loss a/c	Cr

Particulars

Amount

Particulars

Amount

To Rent
To Salaries
To Interest
To Taxes
To Depreciation
To General Reserve
To Net Profit

2,50,000
4,50,000
12,40,000
14,00,000
2,10,000
50,000
18,00,000

By Gross Profit

54,00,000

But for the appropriation to general reserve, the net profit would have been Rs. 18,50,000.

Both charge on profits and appropriation of profits would result in a debit to the profit and loss account resulting in a reduction in the available profit or increase in existing losses.

Appropriation would result in the profit being transferred to another account whereby we can say that the profits are being maintained in multiple accounts instead of a single account.

Appropriation is transfer from the profit and loss account and charge is transfer to the profit and loss account.

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