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Appropriation and partners' accounts
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In a partnership, profit for the year is shared out in an appropriation account. Partners' current accounts record what each is owed.
The appropriation account
Starts with profit for the year from the income statement.
Add interest charged on drawings.
Less partners' salaries.
Less interest on capital.
The residual profit is shared in the profit-sharing ratio.
Add interest charged on drawings.
Less partners' salaries.
Less interest on capital.
The residual profit is shared in the profit-sharing ratio.
Example
Capital and current accounts
Capital accounts usually stay fixed and record the capital each partner invested.
Current accounts record the year's items:
Credit: salary, interest on capital, share of profit.
Debit: drawings, interest on drawings, share of a loss.
The current account balances appear under capital in the statement of financial position.
Current accounts record the year's items:
Credit: salary, interest on capital, share of profit.
Debit: drawings, interest on drawings, share of a loss.
The current account balances appear under capital in the statement of financial position.
Profit for the year is £30 000. C gets a salary of £6000. The rest is shared equally between C and D. How much does C receive in total?
- Residual = 30 000 − 6000 = £24 000
- C's share = 12 000
- C total = 6000 + 12 000
Answer: £18 000
Appropriation: profit + interest on drawings − salaries − interest on capital = residual profit, shared in the profit-sharing ratio. Capital accounts are fixed; current accounts are credited with salary, interest and profit share and debited with drawings.
The interactive lesson includes the diagrams for this topic.
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