Capital generated/accumulated through profits

Manufacturing a/c, Trading a/c, Consignment a/c, Joint Venture a/c, Contract a/c etc., represent the ledger accounts used for ascertaining the core profit out of a certain kind of activity. Each of these account show up a certain amount of profit/loss which represents the core profit/loss from that activity.

An organisation may be carrying on one or more of such activities. Depending on the number of such activities being carried on by the organisation we find the relevant accounts in the books of accounts of the organisation.

Only one Profit/Loss account

Profit and loss account reveals the final profit/loss left with or made by the organisation from all the activities taken up by the organisation.

Profit and loss account is also a nominal account. It is closed at the end of the accounting period by transfer to the Capital account or the Profit and Loss appropriation account. This amount that has been transferred represents the capital accumulated through profits of the current accounting period.

The appropriations of profits or absorptions of losses may be recorded through the profit and loss account directly in which case the postings relating to such appropriations and absorptions are present in the profit and loss account.

Dr Profit and Loss a/c Cr
Particulars	Amount	Particulars	Amount
To Rent To Salaries To Interest To Taxes To Depreciation To Reserve for Bad Debts To General Reserve To Special Reserve To Goodwill Written off To Discount on issue of Shares To Net Profit	2,50,000 4,50,000 12,40,000 14,00,000 2,10,000 42,000 1,50,000 50,000 25,000 30,000 15,67,000	By Gross Profit By Contingency Reserve	54,00,000 14,000
	54,14,000		54,14,000

The Net Profit revealed by the Profit and Loss account would be the profit after appropriations and absorptions. The capital accumulated through the current period profits would be a figure that is different from the figure of net profit.

Where the organisation intends to have a clear idea of the Net profit earned through operations and the net profit remaining after appropriations and absorptions, it would maintain a separate account by name Profit and Loss Appropriation account for the purpose.

The Net Profit after taking into consideration all the charges and accruals would be transferred from the profit and loss account to the Profit and Loss account Appropriation account and the appropriations and absorptions are recorded through that account.

Dr Profit and Loss a/c Cr
Particulars	Amount	Particulars	Amount
To Rent To Salaries To Interest To Taxes To Depreciation To Reserve for Bad Debts To Goodwill Written off To Discount on issue of Shares To Net Profit (unappropriated)	2,50,000 4,50,000 12,40,000 14,00,000 2,10,000 42,000 25,000 30,000 17,53,000	By Gross Profit	54,00,000
	54,14,000		54,14,000

Dr Profit and Loss Appropriation a/c Cr
Particulars	Amount	Particulars	Amount
To General Reserve To Special Reserve To Net Profit	1,50,000 50,000 15,67,000	By Net Profit (unappropriated) By Contingency Reserve	17,53,000 14,000
	17,67,000		17,67,000

The appropriation account may be treated like any other nominal account. It may be closed by transferring the balance to capital account. Every accounting period the appropriation account would be created afresh.

Dr Capital a/c Cr
Particulars	Amount	Particulars	Amount
To Balance c/d	64,03,000	By Balance b/d By Net Profit	48,36,000 15,67,000
	64,03,000		64,03,000

Note: Of the opening balance of capital,

• Capital invested by owners - 15,00,000. Capital
• Capital accumulated through profits - 33,36,000.

Where the appropriation account is closed by transferring the balance to capital account, the capital accumulated through profits earned through operations gets added up to the capital account every year.

Balance Sheet of M/s ___ as on ___
Liabilities	Amount	Assets	Amount
Capital	64,03,000	...	...

The information relating to the capital investment made by the ownership and the capital accumulated through profits may not be readily available in the balance sheet.

The appropriation account may be treated as a special nominal account. Its balance may be carried forward to the subsequent accounting periods. It would be shown distinctly under capital and reserves on the liabilities side of the balance sheet.

Dr Profit and Loss Appropriation a/c Cr
Particulars	Amount	Particulars	Amount
To General Reserve To Special Reserve To Net Profit	1,50,000 50,000 49,03,000	By Balance b/d By Net Profit (unappropriated) By Contingency Reserve	33,36,000 17,53,000 14,000
	51,03,000		51,03,000
		By Balance b/d	49.03,000

In such a case, the capital accumulated through profits earned through operations over the various accounting periods gets accumulated in the appropriation account and the Capital account balance indicates the amount of capital brought in by the organisational ownership.

Dr Capital a/c Cr
Particulars	Amount	Particulars	Amount
To Balance c/d	15,00,000	By Balance b/d	15,00,000
	15,00,000		15,00,000

Balance Sheet of M/s ___ as on ___
Liabilities	Amount	Assets	Amount
Capital Profit and Loss Appropriation	15,00,000 49,03,000	...	...