The document discusses the appropriation of profits process for a limited liability company. It explains that net profits are transferred to an appropriation account rather than share capital accounts. The appropriation account is used to allocate profits between dividends, reserves, and retained earnings. It contains key items like the profit/loss for the year, retained profits brought forward, proposed dividends, transfers to reserves, and retained profits carried forward. The document also distinguishes between capital reserves, which are not used for dividends, and revenue reserves, which can be used for dividends. An example appropriation account is provided.

1. Appropriate profits between
dividends and reserves
Appropriation of profits
Section 9
Objective 8

2. Appropriation of profits

3. Appropriation of profits
• The capital of a limited company is made of
different types of shares
• The amount of shares are only increased when
new shares are issued
• Net profit is not transferred to any share capital
accounts in a limited liability company
• The net profit is transferred to an account known
as an appropriation ( also called statement of
retained earnings or statement of owners equity
account)

4. Appropriation of profits
• The appropriation account is one of the
financial statements of a limited liability
company
• The appropriation account is used for the
allocation of profits and for reserves.
• The remaining profit that is not allocated is
carried forward as a credit balance in the
appropriation account

5. Appropriation of profits
• The account contains the following key
components
– The profit or loss for the year transferred from the
income statement
– Any profits made in the past which were not
distributed ( known as retained profits or
undistributed profits brought forward)
– Proposed dividends (the amount recommended by
board of directors to be paid to shareholders)

6. Appropriation of profits
– The transfer of the remaining profits to general
reserve or any other reserve
– The closing balance of profits which have not been
distributed as dividends or set aside as
reserves(called retained profits or undistributed
profits carried forward)

7. Appropriation of profits

8. Appropriation of profits
• Corporation tax is the government tax that must
be paid on the profits made by the company
• Proposed dividends are the profits made by the
company which directors recommend to be paid
to shareholders. This amount will be agreed by
shareholders in the next Annual General
Meeting (AGM)

9. Reserves
• Two major types of reserves used by
companies to set aside funds are
– capital reserves and
– revenue reserves

10. Capital reserves
• The features of capital reserves are as follows:
– Capital reserves are allocated in the appropriation
account and shown in the balance sheet
– They are a part of the profits of a company which
are set aside for a particular purpose
– Capital reserves are not to be used for dividend
payments
– Capital reserves include
» Share premium
» Replacement of fixed assets
» Plant expansion
» Corporation tax

11. Revenue Reserves
• The features of revenue reserves are as follows:
– Revenue reserves are amounts set aside annually from
profits for any purpose decided by management
– It is required by law to set aside a revenue reserve
fund
– Disclosure of the fund must be stated in financial
statements
– These reserves can be used for payment of dividends
– Revenue reserves include
» General reserve
» Profit and loss account

12. Appropriation account
• The next slide contains an example of
appropriation account and the key components
• To label your appropriation account, the
heading should contain the following
information
»The name of the organisation
»The name of the financial statement
»The date at which it is being prepared

13. Appropriation account
$ $
Profit for the year X
Less: transfer to general
reserve
X
Proposed dividends:
Preference shares (%) X
Ordinary shares X
X
Retained profit for the year X
Add retained profits brought
forward
X
Retained profit carry
forward
X

14. Go to the next slide for the review activity

15. • At the beginning of the current financial year,
the company has issued the following shares
300 000, 5% preference share of $1 each and 1
million ordinary shares at $1 each.
• Required:
– Prepare and appropriation account

16. • Assume that a company has $150 000 of retained
profit as an opening balance. The company made
a profit of$140 000 during it current year.
• At the end of the financial year, the company’s
board of directors proposed the payment of a
preference share dividend and a 25% ordinary
share dividend.
• The board of directors also proposed a transfer of
$50 000 to a general reserve fund