Partnership accounts

The Appropriation Account

Purpose

The appropriation account follows directly from the income statement. It shows how the profit (or loss) for the year is divided between the partners according to the partnership agreement.

Elements and Order

The appropriation account always follows this sequence:

Partner salaries are NOT an expense in the income statement. They appear only in the appropriation account to recognise different levels of contribution to the business. They are not paid in cash — they are credited to the partner's current account.

Format

Partnership name — Appropriation account for the year ended [date]
                                                £           £
Profit for the year                                     27,967
Add: interest on drawings
  Smith (£1,640 × 5%)                          82
  Jones (£3,580 × 5%)                         179          261
                                                        28,228
Less: salaries
  Smith                                                 (3,000)
Less: interest on capital
  Smith (£12,000 × 15%)                      1,800
  Jones (£10,000 × 15%)                      1,500       (3,300)
Remaining profit                                        21,928
Split of remaining profit (equally):
  Smith (× 50%)                             10,964
  Jones (× 50%)                             10,964      (21,928)

Key Points

• If remaining balance is a loss, it is shared in the same ratio (deducted from each partner's current account)
• Interest on drawings is charged at a fixed % of the drawings for the period — it rewards the partnership when partners withdraw cash
• Interest on capital is paid at a fixed % of the capital account balance — it rewards partners who invest more capital
• If a partner introduces additional capital mid-year, interest on capital is time-apportioned (e.g. capital introduced on 1 December = 6/12 of the annual rate if the year ends 31 May)