Appropriation Account (Edexcel IGCSE Accounting)

Spec point — IGCSE_ACCOUNTING:S4.163

Appropriation account

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 income statement first
  • And then they prepare the profit and loss appropriation account

• It shows how the profit or loss from the income statement 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 income statement

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 income statement

• STEP 2 Add the total interest on drawings

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

• STEP 3 Subtract the total interest on the partners' capital

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

• STEP 4 Subtract the total partner's salaries

  • List the salary for each partner

  • Put the total in the right column

    • If there is only one salary you can put this in the right column straightaway

• STEP 5 Calculate the profit(or loss) available for distribution

  • Profit for the year
  • Add interest on drawings
  • Less interest on capital
  • Less partners' salaries

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

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

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 income statement, 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
• profits and losses are 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 profit available for distribution. 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

• Profit available for distribution: $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:** Interest on drawings **	Final answer:** **	Final answer:** **
Final answer: Jetlin	Final answer: 750
Final answer:** Leander **	Final answer: 100
	Final answer:** **	Final answer:** 850 **
		Final answer:** **
Final answer:** Interest on capital **	Final answer:** **	Final answer:** **
Final answer: Jetlin	Final answer:** 2 500 **	Final answer:** **
Final answer:** Leander **	Final answer: 1 750**	Final answer:
	Final answer:	Final answer: (4 250)
Final answer: Salary
Final answer: Leander	Final answer:	(6 000)
Final answer: Profit available for distribution		Final answer: 20 600
Final answer: Share of profit		Final answer:
Final answer: Jetlin		Final answer: 15 450
Final answer: Leander		Final answer: 5 150
		Final answer: 20 600