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
| 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:
- Commission 3,000
- Interest on capital account 2,000
- Interest on drawings account 500
Partner B:
- Salary 30,000
- Interest on capital account 4,000
- Interest on loan account 2,500
The journal entry necessary to make these adjustments to the appropriation account is as follows.
| 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.
| 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.
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.