Appropriation account

Definition and Purpose of Appropriation Account

• An Appropriation Account is a component of a company’s financial statement that breaks down how the net profit is distributed.
• It highlights the division of profit amongst various heads such as dividends for shareholders, retained profits, and general reserves.
• The purpose of the Appropriation Account is to detail the utilisation of net profits, post all business operations, during a certain accounting period.

Components of Appropriation Account

• The starting point is the net profit, after tax and other business expenses have been deducted.
• Then, the entities to which the net profit is allotted are recorded. These can include shareholders (dividends), retained earnings (the amount kept in the business for future use), and general reserves (an account where part of the profits are kept to meet future contingencies).
• Final figure should show that all of the profit has been attributed. All the subtractions from net profit should equal to the profit after tax.

Importance of Appropriation Account

• Gives shareholders a clear picture of how the company’s profits are utilised.
• Provides information about company’s performance and its future prospects.
• An Appropriation Account can serve as a tool for the company to measure the effectiveness of its profit distribution strategy.

Key Points to Remember

• An Appropriation Account is used to show the distribution of a company’s net profit.
• It usually includes distributions to dividends, retained earnings, and general reserves.
• It aids in ensuring that all profit has been accounted for and provides transparency for company shareholders.
• It serves as a significant tool to understand a company’s financial health and future prospects.