Purpose of the appropriation account
The profit and loss appropriation account is an extension of the profit and loss account that shows how a partnership's net profit is shared among the partners. It takes account of interest on capital, interest on drawings, partners' salaries, and the residual profit shared in the profit-sharing ratio.
The appropriation account keeps the sharing of profit separate from the trading and profit and loss account, which measures how much profit was earned. This separation makes clear that interest, salaries and the profit share are not business expenses but ways of dividing profit that already belongs to the partners.
Debit and credit rules
- Interest on capital — credited to partners, so it is debited in the appropriation account (profit given to partners).
- Partners' salaries — also debited in the appropriation account.
- Interest on drawings — charged to partners, so it is credited in the appropriation account (adds to profit to be shared).
- Residual profit — shared in the profit-sharing ratio.
Key idea
Distributable profit = Net profit + Interest on drawings − Interest on capital − Partners' salaries. This balance is then shared in the ratio.
Worked example
Example
Net profit RM40,000. Interest on capital (total) RM6,000; partners' salaries RM12,000; interest on drawings (total) RM1,000. Residual profit = 40,000 + 1,000 − 6,000 − 12,000 = RM23,000. If partners A:B share 3:2, A's share = 23,000 × 3/5 = RM13,800 and B = RM9,200.
Layout of the account
The appropriation account starts with the net profit brought down from the profit and loss account. Interest on drawings is added to it; then interest on capital, partners' salaries and each partner's share of the remaining profit are deducted so the account balances to nil. The interest, salary and profit-share figures are then posted to each partner's current account.
Remember
Interest on drawings is not an expense — it increases the profit to be shared. Interest on capital and salaries reduce the balance left to share.