A ledger account

Remember, the trading, profit and loss account is first and foremost a ledger account, and the appropriation account a division of it. So we should begin by treating it as such. Suppose we have all the accounting information ready in the trial balance: this is how we would go about preparing the final accounts.

What you need

• the ledger (all divisions)
• the journal
• the trial balance
• details of end of year adjustments.

Compiling company final accounts step by step

Turn back to page 83 and see the tips for preparatory work before you put together the final accounts. Remember to alter your trial balance to take account of adjustments, and to label each item in it according to where it will end up in the trading (T), profit and loss (P) account, or balance sheet (B).

• 1.Journalise the ledger postings exactly according to the labelling you have just written on the trial balance. In other words, post each item labelled ‘T’ to the trading account and each item labelled ‘P’ to the profit and loss account. Post them all to the same side of such accounts (debit or credit) as those on which they appear in the trial balance. The other side of the posting, of course, goes to the account from which they are being transferred. (If you are in doubt about how to journalise, see page 39.)
• 2.When you have entered all the ledger postings, write beneath them: ‘To close revenue and expense accounts and transfer balances to the trading, profit and loss account’.
• 3.Now post to the trading account, following exactly the instructions you have just written in the journal.
• 4.Total up and balance the trading account. Bring the balance down to the profit and loss account, as ‘gross profit b/d’.
• 5.Now post to the profit and loss account, following exactly the instructions you have just written in the journal.

• 6.Open an appropriation account immediately below the profit and loss account (see page 117).
• 7.Total up and balance the profit and loss account. Bring the balance down as ‘net profit b/d’.
• 8.In the credit column, record the profit and loss account balance brought forward from last year.
• 9.In the debit column, record the figure for provision for taxation. Note: the calculation of corporation tax is beyond the scope of this book; the figure used in the example is rather arbitrary.
• 10.In the debit column, record the value of ‘proposed dividends on shares’.
• 11.Balance off the account. Write against the balance: ‘profit and loss account balance c/f to next year’.

Worked example

See page 122 for a worked example of posting to the trading, profit and loss acount in the ledger of a limited company using the information given in the trial balance.

Undistributed profit

The directors of a company may not wish to show a high profit and loss account balance, because shareholders may demand a higher dividend as a result. Instead they may transfer part of it to General Reserve. Such a transfer would be an additional debit posting in the profit and loss appropriation account, thereby reducing the profit and loss account balance carried forward to the next year.

Debit profit and loss account

Credit general reserve account