Partnerships: Appropriation Accounts
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
The appropriation account is just an extension of the trading, profit and loss account. In it, we post the appropriation (i.e. sharing out) of net profit between the partners. We do not need an appropriation account in the accounts of a sole proprietor, because all the net profit goes to the one proprietor’s capital account. In a partnership or limited company, things are a little more complicated.
- In a partnership some of the profit may be owed to the partners for interest on capitals they have invested.
- If a partner has drawn money from the business (other than salary) he may have to pay interest on it, according to arrangements between the parties. Any such interest payment will have to be deducted from any interest due to him on his capital. We show such transactions in the appropriation account.
- If a partner has lent money to the partnership, however, that is a very different thing. Any interest payable to that partner would be an expense to the business, not an appropriation of profit. It’s proper place would be in the profit and loss account.
After deducting these items from the net profit (brought down from the profit and loss account) we have to show how the rest of the profit will be shared out. We will show an equal split, or an unequal one, depending on the profit-sharing arrangements between the partners.
What you need
- the ledger
- details of interest rate on capital due to partners
- details of interest rate payable by partners on drawings
- details of partners’ capitals
- details of partners’ drawings
- details of partners’ salaries and/or fees
- details of profit-sharing arrangements.
Work out the interest on capital due to each partner. Remember to apply the correct percentage interest rate. Work out the interest payable by each partner on his drawings, again applying the correct percentage interest rate.