Principles

of Accounts
The Appropriation
Account; the Limited
Company’s Income
Statement
Learning Outcomes:

In this lesson, you will learn about:

● The appropriation of profit between dividends and
reserves
● The financial accounts of limited liability
companies

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The Appropriation Account; the Limited Company’s
Income Statement
Key Terms
 Proposed dividends: the amount of dividend suggested to
shareholders by the board of directors (BOD) for approval at the
annual general meeting (AGM).
 General Reserve: the retained earnings of a company that are set
aside out of the company’s profits to meet future (known or unknown)
obligations. General reserves are unlikely to be used to finance
dividends.
 Auditors: those responsible for auditing the accounts of a
business. Auditing is an independent check of the
accounting information used to prepare a financial
statement. Auditors are appointed by the shareholders of
the company.

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The Appropriation Account and Income
Statement of Limited Liability Companies
Appropriation Account
The financial statements of a limited company include
an appropriation account that shows the decisions
made by the directors about the profits of the
company. The account includes:
 The profit (or loss) for the year, transferred from the
income statement.
 Any profit made in the past that were not distributed
(sometimes called the opening balance or ‘retained
profits brought forward’).

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The Appropriation Account and Income
Statement of Limited Liability Companies

Appropriation Account
Proposed dividends
 The transfer of some of the profits to a general
reserve or any other reserve.
 The closing balance of profit that have been
distrusted (sometimes called ‘retained profits carried
forward’).

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The Appropriation Account and Income
Statement of Limited Liability Companies
Preparing an Appropriation Account
Here is a company’s appropriations account.

Appropriation account for the year ended 30 September 2019

$ $
Profit for the year 205 000
Less: transfer to general reserve 44 000
Proposed dividends:
Preference shares (7% x $100 000) 7 000
Ordinary shares (15% x $800 000) 120 000
(171 000)
Retained profit for the year 34 000
Add: retained profits brought forward 57 000
Retained profits to carry forward 91 000
The Appropriation Account and Income
Statement of Limited Liability Companies
The Income Statement
A limited company’s income statement will include all
the usual information, but may also record the
following items:
 Director’s remuneration: this is the expression used to cover
payments made to directors, such as salaries and fees: the items is an
expense to the company.
 Debenture Interest: this is an expense, and the appropriate amount
should be shown in the income statement in accordance with the
accruals concept – in other words any debenture interest due should
be included and should be also shown as a current liability in the
statement of financial position (balance sheet).

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The Appropriation Account and Income
Statement of Limited Liability Companies
The Income Statement
A limited company’s income statement will include all
Auditors’ remuneration: all but the smallest limited
companies are required to have their accounts audited;
the amounts paid to the auditors are an expense to the
company.
Preparing a limited company’s income statement
 Here is an example of a limited company’s income
statement that includes the three categories of
expenses described on the previous page.

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The Appropriation Account and Income
Statement of Limited Liability Companies

The Income Statement

Preparing a limited company’s income statement
 Note: limited company financial statement often
show figures in thousands or even millions of
dollars: where this is the case the money columns
should be clearly headed $000 or $m.

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 Income statement for the year ended 30 June 2019
$000 $000
Revenue 1 972
Less cost of sales:
Opening inventory 72
Purchases 996
1 068
Closing inventory (88)
Cost of sales (980)
Gross profit 992
Auditor’s remuneration 38
Administration expenses 69
Debenture interest 50
Depreciation of non-current assets 115
Director’s remuneration 162
Distribution costs 39
Wages and salaries 256
(729)
Profit for the year 263
The Appropriation Account and Income
Statement of Limited Liability Companies

EXAM TIP:
 A common mistake is to show debenture interest in the
appropriation account.
 Debenture interest is regarded as an expense and so it
is shown in the expense section of the income
statement

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Summary Questions
By now you should be able to answer the
following:
 What is the purpose of an appropriation account for a
limited liability company?
 Identify two ways in which the income statement of a limited
liability company could differ from that of a sole trader or
partnership.
 What is meant by the term ‘auditors’ remuneration’?
 Why is debenture interest included in the income statement
rather than the appropriation account?

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