Let’s take an example to nail the context right away. Let’s suppose you are running an IT Services company with 5 founders , 20 common shareholders. Now, at the end of the year after looking at the profit and loss account. I as a common shareholder would like to understand how the profits were divided. Which is nothing but appropriation account.
Key Takeaways
- Appropriation accounts are majorly presented by LLC & partnership firms
- Its an extension of profit and loss account
- Summarises the flow of profit to various shareholders and investors
- Government Appropriation accounts in india are prepared by CAG.
What is an Appropriation Account?
In simple words, appropriation is a process of setting aside funds, usually, the profits generated by the company for a specific purpose [1]. These include business expansion, future investments, natural calamities, etc. It is created by both government firms as well as businesses. The appropriation account shows how the company/business funds are distributed among the shareholders, partners, and departments. For companies, the appropriation account shows how the company’s profits are divided. The account shows how the profits are distributed amongst the partners in a partnership. For government-related firms and institutions, it shows how the funds are allocated to specific departments and projects.
How does it work?
The appropriation account is a very crucial component of financial accounting. It can be called the extension of the P&L statement showing how the profits of the company are allocated to the shareholders.
These are mainly prepared by LLCs (Limited Liability Company) and partnerships. To meet the needs of short-term, long-term goals, employee salaries, R&D, dividends, the company must appropriate money for the same. Any expenses are reduced from the funds allocated. Government appropriation accounts come into play when they create their budgets. Credits are taken from the estimated revenue and allocated to the proper agencies. These credits may be unused and can be redistributed to other agencies or for other purposes as well.
What is appropriation account with example.
Let me actually take you through an example, which will clarify on the structure and meaning of appropriation account.
Tech Innovators Ltd.
Appropriation Account
For the Year Ended December 31, 2023
So below is an extract of how the appropriation account eventually gets used.
- Hi there, I’m John Smith, the CFO of Tech Innovators Ltd. Let me walk you through how we allocated our profits for the year ended December 31, 2023.
- At the start of the year, we had a balance of $50,000 carried forward from last year. Throughout 2023, we worked hard and managed to earn a net profit of $200,000.
- This brought our total profit available for appropriation to $250,000.
Now John needs to further categorise this information into more details, which I would do as follows.
Now, let me break down how we decided to allocate these profits:
About Interim Dividend:
– We decided to reward our shareholders with an interim dividend of $1 per share. With 20,000 shares outstanding, this totaled $20,000.
Proposed Final Dividend
– We proposed a final dividend of $1.5 per share, amounting to $30,000 for the 20,000 shares.
Dividend Distribution Tax
– Of course, we had to account for the tax on the total dividend amount, which came to $7,500 at a rate of 15%.
Transfer to General Reserve
– To ensure we have a strong financial cushion, we transferred $50,000 to our general reserve.
Transfer to Debenture Redemption Reserve
– We allocated $10,000 to our debenture redemption reserve to prepare for future redemptions.
Transfer to Sinking Fund
– We also set aside $15,000 in a sinking fund to repay long-term debt.
After making these appropriations, the total came to $132,500. This left us with a balance of $117,500, which we carried forward to the next financial year.
FAQ’s
What is the appropriation account in Parliament?
Now, in the context of appropriation of profits in business, the interested parties are shareholders. However when it comes to a government, then the citizens are the related parties. And the citizens would be interested how the funds were allocated across several ministries and projects. Below is an example of appropriation account in parliament.
So this is an example of appropriation in case of government funds.
Who prepares the appropriation accounts in India?
So just like in case of private business’s you have private chartered accountants from whom I get my annual books audited. So similarly for all government entities, the auditing is done by CAG. And this authority is given by the article 149 of the constitution.
