The Appropriation Account (Junior Cert Business Studies): Revision Notes
📚Revision Notes
The Appropriation Account
What is the appropriation account?
After a business calculates its net profit or loss in the income statement, it needs to prepare one final section called the appropriation account. This small but important section shows how the business allocates its profit between:
- Dividends - payments to shareholders
- Reserves/retained profit - profit kept in the business
Think of the appropriation account as the business deciding what to do with its profit - some goes to shareholders, and some stays in the business for future use.
Note
The appropriation account is essentially the bridge between earning profit and deciding how to use it. It's a crucial step that shows the business's strategy for balancing shareholder rewards with future growth investments.
Components of the appropriation account
Dividends
Important
Dividends are the portion of a business's profit that must be distributed to its shareholders.
Dividends represent the return that shareholders receive on their investment in the company. Here's what you need to know about dividends:
- They are subtracted from the net profit figure
- The dividend amount is usually provided in the trial balance
- If you need to calculate dividends, they are typically worked out as a percentage of the issued share capital
- For example: if a company has issued share capital of €100,000 and declares a 3% dividend, the dividend payment would be €3,000
Note
When calculating dividends as a percentage, remember that the percentage is applied to the total issued share capital, not to the net profit. This ensures that all shareholders receive their proportional return regardless of the company's profitability in any given year.
Opening reserves
Important
Opening reserves are profits that have been carried forwards by a business from previous years.
Opening reserves work in the opposite way to dividends:
- They are added to the current year's net profit
- They represent money that the business earned in previous years but kept in the company rather than paying out to shareholders
- This accumulated profit can now be combined with the current year's profit
Calculating the appropriation account
The formula for calculating the appropriation account is straightforward:
This calculation tells you how much profit the business will have left at the end of the year (closing reserves/retained profit).
Note
This formula shows the flow of profit through the business. Net profit comes in, dividends flow out to shareholders, and opening reserves represent the business's accumulated wealth from previous periods.
Practical example
Example
Worked Example: Galway Bakery Ltd Appropriation Account
Let's look at how Galway Bakery Ltd prepares its appropriation account:
Given information:
- Net profit: €45,000
- Dividends paid: €8,000
- Opening reserves on 1/1/2023: €15,000
Appropriation Account for Galway Bakery Ltd
| Item | € | € |
|---|---|---|
| Net profit | 45,000 | |
| Less: Dividends paid | 8,000 | |
| 37,000 | ||
| Add: Opening reserves | 15,000 | |
| Reserves/retained profit on 31/12/2023 | 52,000 |
This shows that Galway Bakery Ltd will have €52,000 in retained profit at the end of the year, which becomes next year's opening reserves.
Summary
Key Points to Remember:
- The appropriation account comes after calculating net profit in the income statement
- Dividends are subtracted because they leave the business and go to shareholders
- Opening reserves are added because they represent additional profit available to the business
- The final figure shows how much profit the business retains for future use
- The closing reserves figure becomes next year's opening reserves
- This account helps show how a business balances rewarding shareholders with building up reserves for growth