Partnership Appropriation Account

A partnership appropriation account is an intermediary account between the profit and loss account of the partnership and the individual capital accounts of each partner.

The purpose of the partnership appropriation account is to allow adjustments to be made to the net income from the profit and loss account before distribution of any residual net income is made to the partner capital accounts. The adjustments include such items as partner salaries and interest on partner capital, loans and drawings accounts.

Partnership Appropriation Account Example

The partnership appropriation account sometimes referred to as the trading profit and loss appropriation account is initially credited with the net income (or debited with the net loss) from the profit and loss account of the partnership.

Net Income Available for Appropriation

By way of example, assuming the partnership profit and loss account showed a net income for the year of 95,000, the following journal entry is posted to transfer the net income from the profit and loss account to the partnership appropriation account.
Net income transferred to the appropriation account
Account Debit Credit
Profit and loss account 95,000
Appropriation account 95,000
Total 95,000 95,000

 

Appropriation Adjustments

The net income or loss on the account is then adjusted with a credit entry for interest on drawings and debit entries for partner salaries, commissions, and interest on partner capital and loan accounts.

Assuming in our example the following adjustments are required.
Partner A:

  1. Commission 3,000
  2. Interest on capital account 2,000
  3. Interest on drawings account 500

Partner B:

  1. Salary 30,000
  2. Interest on capital account 4,000
  3. Interest on loan account 2,500

The journal entry necessary to make these adjustments to the appropriation account is as follows.

Appropriation account adjustments journal entry
Account Debit Credit
Appropriation account 41,000
Commission A 3,000
Interest on capital A 2,000
Interest on drawings A 500
Salary B 30,000
Interest on capital B 4,000
Interest on loan B 2,500
Total 41,500 41,500

These adjustments for salaries, commission, and interest are normally posted to the partners current account.

Adjustments Posted to the Partnership Appropriation Account

After the adjustment journal entry has been posted the appropriation account would take the format shown in the example below. For clarity, in this example each line item is posted individually to the partnership appropriation account.

Partnership Appropriation Account
Debit Credit
Net income 95,000
Commission A 3,000 Interest on drawings A 500
Interest on capital A 2,000
Salary B 30,000
Interest on capital B 4,000
Interest on loan B 2,500
Balance c/d 54,000
Total 95,500 Total 95,500
Balance b/d 54,000

The balance brought down of 54,000 represents the residual net income to be distributed between the partners.

Residual Net Income is Distributed to the Partners

Assuming that in this example the partnership agreement shows that profits are to be distributed equally then the partnership appropriation account is closed using the following journal.

Distribution of Partnership Income
Account Debit Credit
Appropriation account 54,000
Capital A 27,000
Capital B 27,000
Total 54,000 54,000

After this distribution journal entry the partnership appropriation account would be shown as follows.

Partnership Appropriation Account
Debit Credit
Net income 95,000
Commission A 3,000 Interest on drawings A 500
Interest on capital A 2,000
Salary B 30,000
Interest on capital B 4,000
Interest on loan B 2,500
Balance c/d 54,000
Total 95,500 Total 95,500
Balance b/d 54,000
Capital A 27,000
Capital B 27,000
Total 54,000 Total 54,000

The partnership appropriation account shows how the net income of the partnership (95,000) has been appropriated by salaries, commissions, and interest (41,000) and distributions to the partners (54,000).

Partnership Appropriation Account Format

In the final accounts the partnership appropriation account is usually presented in a more readable format. The example below shows the information presented in a typical vertical format.

partnership appropriation account
 

This vertical partnership appropriation account format shows the net income available for appropriation from the partnership profit and loss account of 95,000 and the manner it which it is appropriated as to salaries, commissions and interest of 41,000 and partner distributions of 54,000.

Partnership Appropriation Account July 12th, 2018Team

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