Partnership appropriation: worked examples

Method and where the marks are

The appropriation account answers one question: once the firm has its net profit, how is the profit shared among the partners under their agreement? It is a sequence of additions and deductions in a set order. Following the order earns the marks.

Do not confuse it with the income statement. The income statement finds the profit. The appropriation account shares it out.

Real business expenses, such as rent, employees' wages and depreciation, belong in the income statement. Rewards to a partner for being a partner belong in the appropriation account. These are interest on capital, partnership salary and share of residual profit.

Work in this order. Begin with net profit from the income statement.

Add interest charged on the partners' drawings. This interest is paid back into the firm for taking money out early, so it increases the profit available to share. Then deduct interest on capital, followed by any partnership salary. Interest on capital rewards partners for money invested, and is usually a stated percentage of the fixed capital balance.

A partnership salary rewards extra work and is not an employee's wage. What remains is the residual profit.

Share it in the agreed profit-sharing ratio. Each partner's total is interest on capital plus salary plus share of residual profit, less interest on their own drawings.

For example, net profit is RM60,000. One partner has a salary of RM5,000. Each partner earns 5% interest on capital of RM40,000, which is RM2,000 each.

Interest on drawings totals RM1,000. Profit available is 60,000 + 1,000 = RM61,000.

Deduct the salary of RM5,000 and interest on capital of RM4,000. The residual is RM52,000, so with equal shares each partner takes RM26,000.

Interest on drawings appears twice. It is added to the pool, and it is also charged against the partner who made the drawings. That is not double counting.

The addition raises the profit to share. The charge reduces that partner's current account.

Lay the account out vertically and label every line. If current accounts are asked for, they must agree with the appropriation account. Each current account is credited with interest on capital, salary and share of profit.

It is debited with drawings and interest on drawings. Show the opening balance on the correct side.

A credit balance is normal, meaning the firm owes the partner. Under the fixed capital method, keep capital and current accounts separate.

Marks are mostly lost on placement and direction. Partners' salaries or interest on capital put in the income statement as expenses understate net profit. Interest on drawings deducted from the pool, instead of added, is wrong.

Dividing the whole net profit in the ratio before the deductions ignores the agreement. Read the ratio carefully. A ratio of 3:2 means three-fifths and two-fifths, so add the parts to find the total.

Check two things at the end. The partners' total shares must equal the profit available for appropriation exactly. And each current account balance should be carried down on the side that shows who owes whom.

If appropriation accounts still feel like a long list to memorise, we can help. One of our teachers can work through a past-paper question with you and show the order as a simple ladder. Book a trial class