Appropriation Account (Cambridge International AS Accounting)

Appropriation accounts

Spec point — how to prepare a statement of profit or loss, appropriation account and statement of financial position for a partnership from full or incomplete accounting records. The business may be a trading or a service business

What is the profit and loss appropriation account?

• The profit and loss appropriation account is one of the financial statements prepared by businesses that operate as a partnership

  • The partnership prepares the statement of profit or loss first
  • And then they prepare the profit and loss appropriation account

• It shows how the profit or loss from the statement of profit or loss is split between the partners

  • The distribution of the profit for the year is based on the terms of the partnership agreement

• The appropriation account is part of the double entry system

  • The profit or loss for the year is transferred from the statement of profit or loss

How do I complete the profit and loss appropriation account?

• STEP 1 Put the profit for the year in the right column

  • You get this value from the statement of profit or loss

• STEP 2 Add the total interest on drawings

  • List the interest for each partner
  • Put the total in the right column
  • Add it on to the profit

• STEP 3 Total the interest on the partners' capital

  • List the interest for each partner
  • Put the total underneath

• STEP 4 Total the partner's salaries

  • List the salary for each partner underneath the previous total

    • If there is more than one salary you can create a new column for totalling them up

• STEP 5 Subtract the total interest on capital and partners' salaries

  • Subtract from the previous value in this column
  • This gives the residual profit

• STEP 6 Share the residual profit in the ratio described in the partnership agreement

  • List the profit for each partner
  • Put the total in the right column

Layout of the profit and loss appropriation account

Exam Hint Students can get confused when trying to remember whether to add or subtract interest on drawings. Remember that this statement is from the point of view of the business. Therefore, the interest on drawings is added as the business is owed more money from the partners.

Also remember partner's loan interest is charged to the statement of profit or loss not the appropriation account.

Worked Example Jetlin & Leander are in partnership, their year end is 31^st December 2023.

The following information was taken from their books:

	$
Profit for the year	30 000
Capital:	Jetlin	50 000
	Leander	35 000
Salaries:	Jetlin	5 000
	Leander	6 000
Drawings:	Jetlin	7 500
	Leander	1 000

The partnership agreement provides for the following:

• interest on capital of 5% per annum
• interest on drawings of 10%
• a salary to Leander of $6 000 per annum
• residual profits and losses shared 75% to Jetlin and 25% to Leander.

Prepare the appropriation account for Jetlin and Leander for the year ended 31 December 2023.

Answer:

• Calculate the interest on capital by multiplying each partner's capital by 5%

Jetlin: 5% × $50 000 = $2 500

Leander: 5% × $35 000 = $1 750

• Calculate the interest on drawings by multiplying each partner's drawings by 10%

Jetlin: 10% × $7 500 = $750

Leander: 10% × $1 000 = $100

• Calculate the residual profit (this is usually done in the appropriation account)

  • Start with the profit for the year $30 000
  • Add the interest on drawings: + $750 + $100
  • Subtract the interest on capital: - $2 500 - $1 750
  • Subtract the salary: - $6 000
  • Residual profit: $20 600

• Calculate the share of profit for each partner by multiplying the residual profit by the given percentages

Jetlin: 75% × $20 600 = $15 450

Leander: 25% × $20 600 = $5 150

Complete the appropriation account using the required format

Final answer: Jetlin & Leander Final answer: Appropriation Account for the year ended 31 December 2023
Final answer:		Final answer: $**	Final answer: $
Final answer: Profit for the year		Final answer:** **	Final answer:** 30 000 **
Final answer:** Add: Interest on drawings **	Final answer: Jetlin	Final answer:** 750 **	Final answer:** **
	Final answer:** Leander **	Final answer:** 100 **	Final answer: 850**
			Final answer: **30 850 **
Final answer:** Less:**		Final answer:	Final answer:
Final answer: Interest on capital	Final answer: Jetlin	Final answer: 2 500	Final answer:
	Final answer: Leander	Final answer: 1 750 **	Final answer:** **
		Final answer: 4 250	Final answer:
Final answer: Salary	Final answer: Leander	Final answer: 6 000**	Final answer: 10 250
		Final answer:	Final answer: 20 600 **
Final answer: Profit share	Final answer: Jetlin	Final answer: 15 450	Final answer:** **
	Final answer:** Leander **	Final answer:** 5 150 **	Final answer:** 20 600