Key Difference – P&L vs P&L Appropriation Account
Companies prepare a number of accounts and statements at the financial year-end to communicate results. Some of these statements are published for the use of wider stakeholder range while others are prepared to assist in management decision-making. P&L and P&L Appropriation Account are such two statements prepared at the end of each financial year. The key difference between P&L and P&L appropriation account is that P&L account demonstrates the profit generated by the business whereas P&L Appropriation Account shows how profits will be distributed to relevant aspects such as dividend payments and reserves.
CONTENTS
1. Overview and Key Difference
2. What is P&L
3. What is P&L Appropriation Account
4. Side by Side Comparison – P&L and P&L Appropriation Account
5. Summary
What is P&L Account?
P&L, an abbreviation for profit and loss account, indicates the amount of profits made during an accounting year. The final figure in the account is the net profit, derived after deducting all the expenses incurred for business operations; this is the profits available for shareholders. This account does not provide an indication as to how the earned funds will be spent and for which purpose they will be used. P&L account is known as the ‘income statement’ according to more recent accounting terminology and is a published financial statement.
What is P&L Appropriation Account?
P&L Appropriation Account is a separate account that shows how funds transferred from the P&L Account will be spent. If the business made a loss for the period, then there will be no use in creating a P&L Appropriation Account. Below are the common ways in which funds will be allocated in the P&L Appropriation Account.
Funds Assigned for Dividends
Dividends are the annual return for shareholders for their capital investment. While the company may decide not to pay a dividend in certain years, this is generally one of the expenses that take priority.
New Investment Projects
New investment projects require a significant amount of capital investments where companies have to accumulate funds over a period of time.
Retained Earnings
Retained Earnings contains a portion of profits that will be reinvested in the business in any required manner. Companies commonly use these funds to purchase assets and inventory, pay off outstanding debts and to make short-term investments. In some years dividends, will not be paid and respective funds will also be transferred to retained earnings.
P&L appropriation account provides vital information for shareholders that indicate the use of funds by the business. By looking at this account, shareholders can understand the portion of profits dedicated to dividends and other investment decisions.
The profit and loss appropriation account is similar to any other general ledger account. It consists of a debit column and a credit column. The debits include items such as the funds that are transferred back to the P&L account at the end of the financial year. Other debits include money put in the general company reserve accounts, accounts designated for dividend payments and payments made on items such as income taxes.
When funds are added to the P&L Appropriation Account, these are designated as a credit in the records. The primary entry in the account comes in the form of the surplus money transferred to the account from the profit and loss account at the end of the previous accounting period. Net profit at the end of the current year is also added to this account. Funds used for other capital projects are also credited in this account.
Figure 1: Higher growth in profits allow more funds to be allocated effectively among many options
What is the difference between P&L and P&L Appropriation Account?
P&L vs P&L Appropriation Account |
|
| P&L account reports the profit generated for an accounting period. | P&L appropriation account shows how the profits will be distributed to relevant aspects such as dividend payments and reserves. |
| Preparation | |
| P&L is an account prepared by all types of businesses. | P&L appropriation account is prepared by partnerships and companies. |
| Opening Balance and Closing Balance | |
| P&L is prepared for a specific accounting year, thus does not have an opening balance and closing balance. | P&L Appropriation Account is brought forward from the previous year and will be carried forward to the next, thus have an opening and closing balance. |
Summary – P&L vs P&L Appropriation Account
The difference between P&L and P&L appropriation account is that while P&L account records the profit for the year, P&L appropriation account records the uses of the profit by distinguishing the activities for which the profits will be distributed to. P&L is predominantly important in income and expenses management to improve profit levels. Appropriation account helps to evaluate how effectively the net income is utilized for future projects and investments; thus this is a forward-looking statement.
Reference:
1. “What Is Profit & Loss Appropriation Account?” Small Business – Chron.com. Chron.com, 15 Dec. 2011. Web. 07 Mar. 2017.
2. Lacoma, Tyler. “Differences Between a Profit-and-Loss Account and a Profit-and-Loss Appropriation Account.” EHow. Leaf Group, 20 July 2011. Web. 07 Mar. 2017.
3. “Company Final Accounts – Explained!” YourArticleLibrary.com: The Next Generation Library. N.p., 02 July 2015. Web. 07 Mar. 2017.
4. Poonam Singh. “Rohan acs ppt (1).” LinkedIn SlideShare. N.p., 09 Feb. 2015. Web. 07 Mar. 2017.
Image Courtesy:
1. “Gdi 2netprofitgrowthchar” By Gulf Drilling International – (Public Domain) via Commons Wikimedia