Lesson Note on Company Final Accounts: Appropriation Items and Reserves for SSS 2

Class: Senior Secondary School 2 (SS2 / SSS2)
Term: Third Term
Week: 9
Age: 16 years
Duration: 45 minutes
Subject: Financial Accounting
Curriculum Theme: Final Accounts of Companies
Previous Lesson: Loan Capital: Debentures, Mortgage and Debenture Accounts.
Topic: COMPANY ACCOUNT (FINAL ACCOUNT)
Subject Matter: Profit and loss appropriation account, amount written off (goodwill, preliminary expenses), amount transferred to reserve, bonuses, dividends

Specific Objectives

By the end of the lesson, pupils should be able to:

Cognitive Domain:

• Define Profit and Loss Appropriation Account.
• State the purpose of a Profit and Loss Appropriation Account.
• Identify items treated in the Profit and Loss Appropriation Account.
• Explain the treatment of goodwill written off and preliminary expenses written off.

Affective Domain:

• Appreciate the importance of preparing accurate company final accounts.
• Value the role of reserves, bonuses, and dividends in company finance.
• Participate actively in class discussions on company accounts.

Psychomotor Domain:

• Prepare a simple Profit and Loss Appropriation Account.
• Record accurately the treatment of goodwill, preliminary expenses, transfers to reserves, bonuses, and dividends.

Social Domain:

• Collaborate effectively with peers in solving accounting problems.

Reference Materials

The following resources were used in planning this lesson:

• Senior Secondary Schools Education Curriculum
• State Unified Scheme of Work
• Financial Accounting for Senior Secondary Schools, by Frank Wood
• Companies and Allied Matters Decree (CAMD) 1990
• Securities and Exchange Commission (SEC) requirements
• Nigerian Stock Exchange (NSE) requirements
• https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f3/technical-articles/appropriation-account.html
• https://www.iasplus.com/en/standards/ias/ias10

Instructional Materials

The teacher will teach this lesson with the aid of:

• Charts showing a sample Profit and Loss Appropriation Account.
• Copies of CAMD 1990, SEC and NSC requirements (extracts).
• Copies of company’s financial statements.
• Whiteboard and markers.

Rationale for the Lesson

Understanding company final accounts, particularly the appropriation account, is important for pupils as it shows how a company’s profit is distributed. This knowledge helps them understand business finance and is essential for future careers in accounting, finance, or business management.

Prerequisite/Previous Knowledge

Pupils are expected to have prior knowledge of preparing final accounts for sole proprietorships, including the Trading Account and Profit and Loss Account, and basic concepts of company formation.

Lesson Content/Board Summary

COMPANY FINAL ACCOUNTS

Profit and Loss Appropriation Account

The Profit and Loss Appropriation Account is a financial statement prepared by limited companies to show how the net profit for the year, as determined by the Profit and Loss Account, is distributed or appropriated among various uses.

Its main purpose is to show:

• How much of the profit is transferred to reserves.
• How much is paid out as dividends to shareholders.
• The retained earnings (undistributed profit) carried forward to the next year.

Items Treated in Appropriation Account

Goodwill Written Off

Goodwill is an intangible asset representing the value of a company’s reputation, brand name, and customer loyalty. When purchased goodwill is written off, it means its value is reduced over time. In the appropriation account, it reduces the profit available for distribution.

Preliminary Expenses Written Off

Preliminary expenses are costs incurred before the commencement of business operations, such as legal fees for company registration, stamp duties, and prospectus printing. These expenses are typically written off against profits over a period, reducing the profit available for appropriation.

Transfer to Reserve

A reserve is an amount set aside from profits for a specific purpose or to strengthen the company’s financial position. Common types include General Reserve, Capital Redemption Reserve, and Revenue Reserve. Transfers to reserves reduce the profit available for dividends.

The following are common reasons for transferring to reserves:

• To meet future contingencies or expansion plans.
• To comply with legal requirements (e.g., Capital Redemption Reserve).
• To stabilize dividend payments.

Bonuses

Bonuses can be in the form of cash or bonus shares (scrip dividends). Cash bonuses are payments made to employees or directors from profits. Bonus shares are additional shares issued to existing shareholders without any payment. Both affect the profit available for distribution or the capital structure.

Dividends

Dividends are distributions of a company’s profits to its shareholders. They can be:

• Interim Dividends: Declared and paid during the financial year before the final results are known.
• Final Dividends: Declared after the year-end and approved by shareholders at the Annual General Meeting.

Both interim and final dividends reduce the profit available for appropriation.

Worked Example 1: Preparation of Profit and Loss Appropriation Account

The following information relates to XYZ Ltd for the year ended 31st December 2023:

• Net Profit for the year: N500,000
• Goodwill written off: N50,000
• Preliminary Expenses written off: N30,000
• Transfer to General Reserve: N100,000
• Interim Dividend paid: N80,000

Required: Prepare the Profit and Loss Appropriation Account for XYZ Ltd.

Solution:

XYZ Ltd.
Profit and Loss Appropriation Account
For the year ended 31st December 2023

Note: The retained profit is the amount available for future use or distribution.

Worked Example 2: Appropriation Account with Opening Retained Earnings and Final Dividend

The following balances are extracted from the books of ABC Plc as at 31st December 2024:

• Retained Earnings (1st Jan 2024): N120,000
• Net Profit for the year: N650,000
• Transfer to Revenue Reserve: N150,000
• Directors’ Bonus: N70,000
• Final Dividend Proposed: N200,000

Required: Prepare the Profit and Loss Appropriation Account for ABC Plc.

Solution:

ABC Plc.
Profit and Loss Appropriation Account
For the year ended 31st December 2024

Note: Opening retained earnings are added to the current year’s net profit to get the total profit available for appropriation.

Teaching Methods/Instructional Techniques

Discussion, Lecture, Demonstration, Question and Answer, Visual Aids

Instructional Procedures

Step 1: Introduction

Time: 5 minutes
Teaching Skill: Set Induction
Teacher’s Activity: The teacher reviews the previous lesson on final accounts of sole proprietorship and introduces the concept of company final accounts, specifically the appropriation account.
Pupils’ Activity: Pupils listen, recall previous knowledge, and respond to questions.
Learning Point: Pupils connect prior knowledge to the new topic of company accounts.

Step 2: Explanation of Profit and Loss Appropriation Account

Time: 7 minutes
Teaching Skill: Explanation/Definition
Teacher’s Activity: The teacher defines the Profit and Loss Appropriation Account, explains its purpose, and outlines its relationship with the main Profit and Loss Account.
Pupils’ Activity: Pupils listen attentively, take notes, and ask clarifying questions.
Learning Point: Pupils understand the definition and purpose of the appropriation account.

Step 3: Treatment of Goodwill and Preliminary Expenses Written Off

Time: 7 minutes
Teaching Skill: Explanation/Illustration
Teacher’s Activity: The teacher explains what goodwill and preliminary expenses are, and demonstrates how their write-off is treated in the Profit and Loss Appropriation Account using simple figures.
Pupils’ Activity: Pupils observe the explanation and examples, noting down key points.
Learning Point: Pupils learn how to account for goodwill and preliminary expenses write-offs.

Step 4: Transfer to Reserves

Time: 6 minutes
Teaching Skill: Explanation/Discussion
Teacher’s Activity: The teacher explains the concept of reserves, their importance, and illustrates how transfers to various reserves are recorded in the appropriation account.
Pupils’ Activity: Pupils participate in discussions and understand the purpose and accounting treatment of reserves.
Learning Point: Pupils grasp the concept and treatment of transfers to reserves.

Step 5: Bonuses and Dividends

Time: 7 minutes
Teaching Skill: Explanation/Categorization
Teacher’s Activity: The teacher explains the types of bonuses and dividends (interim, final) and their respective treatments within the Profit and Loss Appropriation Account.
Pupils’ Activity: Pupils listen, distinguish between different types, and understand their impact on the appropriation account.
Learning Point: Pupils learn how to account for bonuses and dividends.

Step 6: Worked Examples

Time: 8 minutes
Teaching Skill: Demonstration/Problem Solving
Teacher’s Activity: The teacher works through comprehensive examples on the board, demonstrating the preparation of a complete Profit and Loss Appropriation Account incorporating all discussed items (goodwill, preliminary expenses, reserves, bonuses, dividends).
Pupils’ Activity: Pupils observe the step-by-step solution, ask questions, and copy the examples into their notebooks.
Learning Point: Pupils develop practical skills in preparing the appropriation account.

Step 7: Evaluation/Review

Time: 5 minutes
Teaching Skill: Questioning/Assessment
Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Define Profit and Loss Appropriation Account.
2. State any three items that are typically treated in the appropriation account.
3. Explain how “goodwill written off” affects the Profit and Loss Appropriation Account.
4. If a company has a net profit of N700,000 and proposes a final dividend of N250,000, what will be the profit available for other appropriations or retained earnings if there are no other adjustments?

Pupils’ Activity: Pupils answer orally and in writing.

Learning Point: Pupils demonstrate understanding of the lesson.

Step 8: Conclusion

Time: 2 minutes
Teaching Skill: Summarization
Teacher’s Activity: The teacher summarizes the key learning points about the Profit and Loss Appropriation Account and assigns homework to prepare a full appropriation account from a given trial balance.
Pupils’ Activity: Pupils listen to the summary and note down the homework.
Learning Point: Pupils consolidate their understanding of the lesson.

Lesson Keywords

• Appropriation Account – An account showing how a company’s net profit is distributed.
• Goodwill – An intangible asset representing the value of a company’s reputation.
• Preliminary Expenses – Costs incurred before a company starts its operations.
• Reserves – Profits set aside for specific purposes or to strengthen financial position.
• Bonuses – Additional payments or shares given from profits.
• Dividends – Distribution of company profits to shareholders.

Differentiation

For struggling learners, the teacher will provide simplified examples and extra guidance during practice. Advanced learners will be challenged with more complex scenarios involving various types of reserves and different dividend policies.

Note for teachers using this lesson plan

Ensure to clearly explain the difference between the Profit and Loss Account and the Profit and Loss Appropriation Account. Emphasize the legal and regulatory requirements (CAMD, SEC, NSE) that influence how companies appropriate their profits. Use current company financial statements as practical examples to make the lesson more relevant.