Profit and Loss Appropriation Account

The essentials

The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It starts with the net profit (or loss) and shows how that profit is distributed among partners. Items that are charges against profit (such as interest on a partner's loan, rent paid to a partner) belong in the Profit and Loss Account; items that are appropriations (rewards to partners as owners) belong in the Appropriation Account.

Key points

• Debit side: interest on capital, salary to partners, commission to partners, transfer to reserve, and the divisible profit shared among partners.
• Credit side: net profit brought from the Profit and Loss Account and interest on drawings.
• Divisible profit = Net profit + Interest on drawings − (Interest on capital + Salary + Commission + Reserve).
• Divisible profit is shared in the profit-sharing ratio.
• If there is a net loss, it appears on the debit side; interest on drawings is still credited.

Exam tips

Draw the account neatly with both sides labelled and show each partner's share separately. Check your answer: total debits must equal total credits.

Common mistakes

• Putting interest on a partner's loan in the Appropriation Account. It is a charge and goes to the Profit and Loss Account.
• Forgetting to add interest on drawings before dividing the profit.