Next under the profit and loss account is a Section called as it would also be in a partnership the profit and loss appropriation account. The Net profit is brought down from the profit and loss account, and in the appropriation account is shown the manner in which the profits are to be appropriation that is how the profits are to be used.
First of all, it any of the profits are to be put to reserve, then the transfer is shown. To transfer to a reserve means that the directors wish to indicate that, that amount of profits, is not to be considered as available for dividends in that year.
After the transfers to reserves the following items will be shown:
(a) Amount written off goodwill: – The usual practice is to write down the value of goodwill in the balance sheet from earned profits. The amount written off during the year is charged to the profit and loss appropriation account.
(b) Amounts written off preliminary expenses:- When a company is formed, the items concerned with the incorporation of the business such as stamp duties, legal expenses etc are shown as an asset in the balance sheet until written down in value. The amount written off during a particular year is charged in the profit and loss appropriation account.
(c) Income tax payable on profits:- Out of the remainders of profits, the dividends are proposed and the unused balance of profits is carried forward to the following year where it goes to swell the profits then available for appropriation.