Learn All About the Appropriation Account
The appropriation account is a document that shows how a business divides its profits. It is one of the important documents, along with the income statement, cash flow statement, and balance sheet. It provides information on how capital is shared among stakeholders and is often reviewed by potential investors and financial institutions to evaluate a business's risk.
The appropriation account explained
Both governments and businesses use appropriation accounts. In government terms, an appropriation account shows the number of funds that have been allocated to specific projects and individual departments. In the business world, an appropriation account is used to provide information on how profits are divided between shareholders, partners and departments.
An appropriation account being used for business purposes is an extension of the profit and loss account statement. Mainly used by limited liability partnerships or incorporated limited companies, appropriation accounts detail how profit capital is shared amongst key stakeholders and where appropriations have been made to finance long-term or short-term business needs. These can include appropriations for employee wages and salaries, dividends for shareholders, marketing campaigns or product research and development projects.
Along with a company’s other consolidated account statements, an appropriation account is often scrutinised by potential investors or lenders. When taken into consideration with the cash flow statement, the income statement and the balance sheet, it provides a clear picture of the current financial situation of an enterprise and can be used to extrapolate future profitability.
How an appropriation account works
Although the theory behind an appropriation account is the same, in reality, appropriation accounts work slightly differently in practice for companies than they do for a limited liability partnership.
A company appropriation account
A company appropriation account will mainly focus on how capital is divided amongst shareholders. The aim of the document is to show how profits are allocated and calculate the number of profits that will be divided amongst shareholders for the next financial year. It will usually show the profits before tax, the amount of tax the company must pay and the profits after tax. Information on any transferred funds to emergency reserve accounts is provided as well as funds used for dividends. A company appropriation account may also detail funds that have been appropriated for operating costs, special projects or business development purposes.
A limited liability partnership appropriation account
An appropriation account for a limited liability partnership will focus on providing information on how profits are shared amongst the partners in the business. It is usually produced after the profit and loss income statement is completed. It will list how the net profits of the business are shared amongst partners and include details on how much interest was earned on the capital. The salaries of the partners will be detailed as well as the remaining profits each partner is entitled to claim.
Why an appropriation account is important ?
An appropriation account is an important document because it ensures that each shareholder or partner is paid the correct amount of dividends according to the agreed terms. Any adjustments that were made during the year are shown.
If there is a dispute amongst shareholders or partners regarding how the business’s profits have been distributed, then the appropriation account can be used to prove that all was in order or dispute the allocations.
Would-be investors and financial lending institutions use the appropriation account to perform calculations that gauge the viability of a business.
For a company, it is a legal requirement that they must produce a set of accounting records including an appropriation account once every financial year. If the company has subsidiaries, it must produce consolidated accounts. These accounts are required to be submitted to Companies House. This requirement is a legal obligation as stipulated by the Companies Act 2006. Failure to comply can result in serious financial penalties or the company may be struck from the register and can no longer legally operate.
Upon request, a company or limited liability partnership must be able to produce an appropriation account for His Majesty’s Revenue and Customs service (HMRC). Failure to produce financial documents when requested by HMRC can result in significant financial penalties.
Language and Preparation
For UK companies and partnerships, appropriation accounts must be written in English and based on the information used to create the profit and loss income statement. An appropriation account is usually prepared by a trained and accredited business accountant. Some companies and limited liability partnerships may use specialised accounting software to help them collect information used in the appropriation account.
Simplifying Accounting Procedures
Ensuring that there are accurate and reliable accounting procedures is just as crucial for a major company as it is for a smaller limited liability partnership. Mooncard offers businesses of all sizes a simple and efficient way of collecting data on expenditures.
Every time a purchase is made on behalf of the business using a Mooncard corporate card, a digital photo of the receipt is taken and uploaded into the Mooncard solution. This is then automatically turned into an expense report and sent directly to your account or accounting department.
To see how the Mooncard system can benefit your business, simply go to the Mooncard website to arrange a free, no-obligation online demonstration.