PREPARATION OF COMPANY INCOME STATEMENT

CONTENTS

1. Profit and loss appropriation account and its uses
2. Treatment of goodwill and preliminary expenses
3. Amount transferred to reserve for bonuses and dividends
4. Preparation of company’s balance sheet
5. Analysis or interpretation of the final account of company using simple rations

DEFINITION OT TERMS

The following terms are defined as they have been used in this book:

PROFIT AND LOSS APPROPRIATION ACCOUNT:

this is an account where the profit after tax is being distributed. The directors will approve the distribution in form of dividend, transfer to reserves etc. it is prepared after the profit and loss account.

DIVIDENDS: this is an amount paid to shareholders of a company from the profit after tax as a reward for investing in the company. Dividend can be paid as an interim dividend or trial dividend.

Interim dividend: is the amount that the company’s board of directors approved for payment before the accounting year ended, that is during the financial year. It is based on certain percentage as approved. NOTE that interim dividend is paid to only the ordinary shareholders.

Final dividend: is the dividend paid at the end of the financial year as proposed by the directors during the annual general meeting.

RESERVE: this is an amount set aside from the profit of an organisation for either a general or a specific purpose. It is called specific purpose reserve when it is for capital reserve, while it is called general purpose reserve if it is just kept to reduce the dividend declaring power.

PRELIMINARY EXPENSES

These are expenses incurred on the formation of company. All expenses incurred prior to commencement of company operation are termed preliminary expenses.

DISTRIBUTABLE PROFIT

The companies and allied matters Act 1990 defines the amount of profit that may be legally distributed by a company. Certain reserves are not distributable under the provisions of the companies and Allied matters Act 1990. The more common reserve so classified are as follows:

1. The share premium account
2. The capital redemption reserve
3. Any reserves which the company is prohibited from distributing. Examples of such reserve are statutory reserves (in case of banks and other deposit houses). Reserves for small scale industries appropriated from profit and revaluation surplus. Distributable reserves are the credit balance in the profit and loss account or a general reserve account.
4. Unappropriated profit is the amount of profit carried forward as a credit balance on the profit and loss account. it is shown as a reserve in the balance sheet.

Format of profit and loss account

FORMAT OF APPROPRIATION ACCOUNT AND BALANCE SHEET