Question

The name of account for the division of netprofit of company is termed as.............

• A. Profit and loss account
• B. Profit and loss appropriation account
• C. Dividend account
• D. Trading account

Answer 1

Answer:

B. Profit and loss appropriation account

• The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account prepared by business entities, particularly partnerships and companies, to illustrate how net profits are distributed or allocated.
• Purpose: It records appropriations of profit such as interest on capital, partners' salaries, commissions, and transfers to reserves, rather than operational expenses which are debited to the standard Profit and Loss Account.
• Accounting Treatment:
  • The net profit derived from the Profit and Loss Account is transferred to the credit side of this account.
  • All allocations or distributions of profit are recorded on the debit side.
  • Any remaining balance represents the divisible profit, which is distributed among owners or shareholders based on the agreed-upon profit-sharing ratio or company policy.
• Key Distinctions:
  • Charge against Profit: These are expenses (e.g., rent, interest on external loans) that must be paid regardless of profit; they are deducted before arriving at net profit.
  • Appropriation of Profit: These are distributions of earned profit; they are only made if the company generates a net profit.
• In the context of Cooperative Societies, this account is crucial for determining statutory reserves, dividend distribution, and allocation to various funds as mandated by the relevant Cooperative Societies Act and Rules.