The appropriation account is another account that is prepared by a partnership. It is a continuation of the income statement and is used to find the profit or loss made by the partnership after making important adjustments. This profit or loss is then appropriated among the partners in the profit-sharing ratio (PSR).
The figure for the profit is taken from the income statement and the following adjustments are made to it:
- Add interest on drawings (if any)
- Decrease interest on capital
- Decrease partner’s salaries (if any)
The resultant profit figure is split between the partners in the agreed-upon profit-sharing ratio.
The interest on drawings, interest on capital and partner’s salaries are all decided upon at the beginning of the partnership in the partnership agreement. If no partnership agreement was created, the following rules apply:
- Profits and losses are shared equally between the partners.
- The partners are not given an interest on their capital or a salary.
- The partners are not charged an interest on their drawings.
However, the partners do receive a 5% interest on any loan they give to the partnership. This is not included in the appropriation account. It is charged as an expense in the income statement.
The format for the appropriation account is simple. The heading of the account would be the partners’ names followed by ‘Appropriation account for the year ended (financial year-end).”
Usually, you start with the profit for the year, then add interest on drawings, subtract interest on capital and subtract partner’s salary. The residual profit is then shared among the partners based on the PSR.
Each partner’s share of profit (or loss) must then be shown in the current account. Use the following entries to transfer this to the current account:
- Debit Appropriation account
- Credit Partner’s current account