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Principles of Accounting · Partnerships

Preparing a profit appropriation account

You share the profit in the ratio straight away, and the marks for interest and salary vanish.

Start the appropriation account with the net profit, add interest on drawings, take off interest on capital and salaries, and share only what is left in the profit ratio. The order matters because the ratio applies to the residual, not to the whole profit.

This lesson is part of the partnerships chapter. The net profit comes from the statement of profit or loss you already know.

What goes in the appropriation account?

The account shows how profit is split. It has four kinds of item.

  • Interest on capital is deducted, and credited to each partner.
  • A partner’s salary is deducted, and credited to that partner.
  • Interest on drawings is added to profit, and charged to the partner.
  • The residual profit is shared in the ratio.

Worked example: Nadia and Kumar

Nadia and Kumar share profits 3:2. Net profit is RM72 000. Capital is Nadia RM80 000 and Kumar RM40 000, with interest at 5%.

Kumar has a salary of RM12 000. Interest on drawings is RM800 for Nadia and RM400 for Kumar.

Line RM
Net profit 72 000
Add interest on drawings (800 + 400) 1 200
73 200
Less interest on capital: Nadia 4 000, Kumar 2 000 (6 000)
Less salary: Kumar (12 000)
Residual profit 55 200

The residual is shared 3:2. Since 55 200 ÷ 5 = 11 040, Nadia gets 3 × 11 040 = RM33 120, and Kumar gets 2 × 11 040 = RM22 080.

Each partner’s total:

  • Nadia: 4 000 − 800 + 33 120 = RM36 320
  • Kumar: 2 000 + 12 000 − 400 + 22 080 = RM35 680

The two totals add to 36 320 + 35 680 = RM72 000, which equals the net profit. The appropriation reconciles.

The mistake that costs marks

One slip is to share the whole RM72 000 in the ratio and stop. Nadia would get RM43 200 and Kumar RM28 800, which ignores the agreement.

Step Wrong Right
First line after net profit Share 3:2 Add interest on drawings
Interest and salary Skipped Deducted before the ratio
Base for the ratio RM72 000 RM55 200
Nadia’s total RM43 200 RM36 320

The fix is to use the same order every time: add, deduct, share, then reconcile.

Check yourself

Net profit is RM54 000. Partner B has a salary of RM6 000. Interest on capital is A RM3 000 and B RM2 000.

The ratio is 1:1. Find each partner’s total share.

Answer

Residual = 54 000 − 6 000 − 3 000 − 2 000 = RM43 000. Each partner gets RM21 500.

A: 3 000 + 21 500 = RM24 500.

B: 2 000 + 6 000 + 21 500 = RM29 500.

Check: 24 500 + 29 500 = RM54 000.

What to study next

Next, post these results into the partners’ accounts in updating partners’ current and capital accounts. The cash profit transaction timeline shows how profit differs from cash.

If you want a teacher to go through appropriation questions with you, see online one-to-one Accounting tuition.

Common questions

Do I deduct salary before or after sharing the profit in the ratio?

Before. Interest on capital and partners' salaries come out first. Only the remaining profit, called the residual, is shared in the profit-sharing ratio.

Is interest on drawings added or deducted?

It is income for the firm, so it is added to the net profit in the appropriation account. It is charged to the partner, so it reduces that partner's total share.

What if there is no partnership agreement?

The default is that profits are shared equally, with no interest on capital and no salaries. Check whether the question gives an agreement, because the agreement replaces the default.

How do I check my answer?

Add each partner's total share: interest, salary and residual share, less interest on drawings. It must equal the original net profit. If it does not, find the missing or repeated item.

If the appropriation order slips when a question adds a new item, a one-to-one Accounting teacher can give you variations until the order is automatic.

  • Online one-to-one lessons for your child with an experienced teacher.
  • Your first class is a one-hour trial, from RM50. The fee is agreed before you book.
  • Happy with the teacher? Continue with lessons of about 1.5 hours. If not, ask for another teacher.