Appropriation Account (Cambridge (CIE) IGCSE Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
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
Account to be debited | Account to be credited | |
---|---|---|
Transferring the profit for the year to the appropriation account | Income statement | Appropriation account |
Transferring the loss for the year to the appropriation account | Appropriation account | Income statement |
How do I complete the profit and loss appropriation account?
STEP 1
Put the profit for the year in the right columnYou get this value from the income statement
STEP 2
Add the total interest on drawingsList 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' capitalList the interest for each partner
Put the total underneath
STEP 4
Total the partner's salariesList 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' salariesSubtract 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 agreementList the profit for each partner
Put the total in the right column
Examiner Tips and Tricks
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 31st 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.
Jetlin & Leander Appropriation Account for the year ended 31 December 2023 | |||
| $ | $ | |
Profit for the year |
| 30 000 | |
Add: Interest on drawings | Jetlin | 750 |
|
Leander | 100 | 850 | |
30 850 | |||
Less: |
|
| |
Interest on capital | Jetlin | 2 500 |
|
Leander | 1 750 |
| |
4 250 |
| ||
Salary | Leander | 6 000 | 10 250 |
| 20 600 | ||
Profit share | Jetlin | 15 450 |
|
Leander | 5 150 | 20 600 |
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