Profit and loss appropriation account. As with a partnership, because there is more than one owner of the business, there must be a statement to show how the profits of the business are to be used. In the case of a company, the profits are either:

(a) distributed- paid out in the form of dividends or taxation; or

(b) retained - held within the business in what are called revenue reserves. These reserves may be of two types:

• specific reserves which indicate that these retained profits are not to be used for dividends to shareholders but are to be held permanently within the business, e.g. fixed asset replacement reserve or general reserve.

• undistributed profits - profits which have not been paid out to shareholders as dividends but are carried forward and may be distributed in future years. This is often called the profit and loss account balance or retained profits. LO.1