How to prepare a partnership appropriation account

Step by step

1. Start with profit for the year. Begin with the profit for the year from the income statement.
2. Add interest on drawings. Add any interest charged on partners' drawings. This increases the profit to share.
3. Deduct interest on capital. Subtract interest allowed to partners on their capital.
4. Deduct partners' salaries. Subtract any salaries agreed for partners.
5. Share the residual profit. Divide the remaining profit between the partners in their agreed profit-sharing ratio.

Worked example

Profit is RM30,000. Less interest on capital RM4,000 and a salary of RM6,000 leaves RM20,000 to share. Shared equally, that is RM10,000 each.

Understanding the method

A sole trader keeps all the profit. A partnership must share it between partners who may have put in different capital, done different work and drawn money at different times.

The partnership agreement sets the rules. The appropriation account puts those rules into practice, starting from the profit the income statement has already worked out.

Appropriations are shares of profit, not expenses. Interest on capital, partners' salaries and interest on drawings never appear in the income statement.

A partner's salary is a reward for ownership, not a cost of trading. Putting it in the expenses would understate profit.

The order is fixed. Start with profit for the year. Add interest on drawings, because partners pay this to the firm.

Deduct interest on capital and salaries, because the firm owes these to partners. Share what remains in the profit-sharing ratio.

Interest on capital is calculated on the fixed capital balance, not on the current account. Interest on drawings is based on the amounts withdrawn, apportioned by months if dates are given.

Here is an example. Aziz and Bala share profits 3:2. Profit for the year is RM60,000.

Interest on capital is 5%, on capital of RM80,000 (Aziz) and RM40,000 (Bala). Bala receives a salary of RM10,000. Interest on drawings is RM1,000 for Aziz and RM500 for Bala.

Profit of 60,000 + 1,500 interest on drawings = RM61,500. Deduct interest on capital (RM4,000 and RM2,000 = RM6,000) and Bala's salary (RM10,000). The residual profit is RM45,500.

Shared 3:2, Aziz gets RM27,300 and Bala gets RM18,200. All of these are posted to the partners' current accounts.

To check, add each partner's credits and take off the interest on drawings charged. Aziz: 4,000 + 27,300 − 1,000 = RM30,300.

Bala: 2,000 + 10,000 + 18,200 − 500 = RM29,700. Together they come to RM60,000, the original profit.

Common mistakes: calculating interest on the current account instead of fixed capital, and deducting interest on drawings instead of adding it. Another is sharing the whole profit in the ratio before dealing with salaries and interest. For each line, ask whether it rewards the owner or repays the firm.

If you are not sure of the order of an appropriation account, we can help. One of our teachers can build one with you step by step, then check your next past-paper attempt. Book a trial class

Related skills

• How to prepare an income statement for a sole trader

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.