P/L Appropriation SAQ
Question 1: What is the purpose of a profit and loss appropriation account?
Answer: A profit and loss appropriation account is used to distribute the profits or losses of a business to its owners or partners. It also records any other adjustments that need to be made to the profit or loss figure, such as interest on capital or drawings by partners.
Question 2: What is the order in which profits are distributed in a partnership firm?
Answer: The order in which profits are distributed in a partnership firm is as follows:
Interest on capital: Partners are entitled to receive interest on their capital accounts. The interest rate is usually agreed upon by the partners in advance.
Salary or commission: If any partners are paid a salary or commission, this will be deducted from the profits before they are distributed.
Profit sharing: The remaining profits are then shared among the partners according to the partnership agreement.
Question 3: What is the difference between a profit and loss appropriation account and a balance sheet?
Answer: A profit and loss appropriation account is a temporary account that is used to distribute the profits or losses of a business for a specific period of time. A balance sheet is a permanent account that shows the financial position of a business at a specific point in time.
Question 4: What is the meaning of the term "drawing" in partnership accounting?
Answer: A drawing is a withdrawal of cash or assets from a partnership by a partner. Drawings are usually deducted from the partner's capital account.
Question 5: What is the difference between interest on drawings and interest on capital?
Answer: Interest on drawings is charged on the amount of cash or assets that a partner has withdrawn from the partnership. Interest on capital is charged on the amount of capital that a partner has invested in the partnership.
Question 6: How is interest on drawings calculated?
Answer: Interest on drawings is calculated using the following formula:
Interest on drawings = (Amount of drawings × Interest rate × Time) / 12
Question 7: What is the purpose of closing the profit and loss appropriation account?
Answer: The profit and loss appropriation account is closed at the end of each accounting period to transfer the profits or losses to the partners' capital accounts. This ensures that the profit and loss account has a zero balance at the beginning of the next accounting period.
SAQ 8: What is the purpose of the profit and loss appropriation account?
Answer: The profit and loss appropriation account is used to summarize the allocation of profits or losses for the period. It is a temporary account that is closed out at the end of the accounting period.
SAQ 9: What are the different ways that profits can be appropriated?
Answer: There are three main ways that profits can be appropriated:
Dividends: Dividends are payments made to shareholders out of the company's profits.
Retained earnings: Retained earnings are profits that are not distributed as dividends but are instead kept by the company for future investment or growth.
Taxes: Taxes are payments made to the government out of the company's profits.
SAQ 10:: What is the difference between ordinary and extraordinary items?
Answer: Ordinary items are items that arise from the normal operations of the business. Extraordinary items are items that are not expected to occur again in the future.
SAQ 11: How are extraordinary items treated in the profit and loss appropriation account?
Answer: Extraordinary items are shown net of tax on the income statement. They are not included in the calculation of earnings per share.
SAQ 12: What is the difference between a prior period adjustment and an error?
Answer: A prior period adjustment is a correction to an error that was made in a previous accounting period. An error is a mistake that was made in the current accounting period.
SAQ 13: How are prior period adjustments and errors treated in the profit and loss appropriation account?
Answer: Prior period adjustments are shown net of tax on a separate statement called the statement of retained earnings. Errors are corrected in the current accounting period.
SAQ 14: What is the difference between a fundamental error and a non-fundamental error?
Answer: A fundamental error is an error that is so material that it could affect the decision-making of users of the financial statements. A non-fundamental error is an error that is not material.
SAQ 15: How are fundamental errors and non-fundamental errors treated in the profit and loss appropriation account?
Answer: Fundamental errors are corrected by restating the financial statements for the prior period(s). Non-fundamental errors are corrected in the current accounting period.
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