Partnership Appropriation Account

In a sole trader's accounts, all the profit belongs to one owner. In a partnership, the profit must be shared between partners according to the partnership agreement. The appropriation account is the statement that does this — it comes after the income statement (which calculates the profit) and shows how that profit is appropriated (divided).

It is important to see what is an expense versus an appropriation:

• Expenses (rent, wages of employees, etc.) are deducted in the income statement to find the profit for the year.
• Appropriations (interest on capital, partners' salaries, profit share) are not expenses — they are ways of dividing the profit that has already been calculated.

So a partner's salary is an appropriation, not a business expense — a common point of confusion.

The appropriation account starts with the profit for the year and adjusts for each item the agreement specifies:

Appropriation account	$
Profit for the year	X
add Interest on drawings (charged to partners)	X
	XX
less Interest on capital	(X)
less Partners' salaries	(X)
= Residual profit (shared in PSR)	X

• Interest on capital — a reward for capital invested; deducted from profit and credited to each partner (encourages investing more capital).
• Partners' salaries — a reward for extra work/responsibility; deducted and credited to that partner.
• Interest on drawings — a charge for taking money out early; added to the profit to share and debited to that partner (discourages early drawings).
• Residual profit — whatever is left, shared in the profit-sharing ratio (PSR).

Each partner's total share = their interest on capital + salary + residual share − interest on drawings, all posted to their current account.

After interest on capital, salaries and interest on drawings have been dealt with, the residual profit is shared in the profit-sharing ratio (PSR):

$\text{Each partner's residual share} = \text{Residual profit} \times \text{their fraction of the PSR}$

Example. Residual profit $60,000; A and B share 3:2 → A gets 60,000 × 3/5 = $36,000; B gets $24,000.

If the business made a loss, or the residual is negative after appropriations, the same method applies — the residual loss is shared in the PSR (partners may still receive interest on capital/salary, which can turn the residual negative). Always:

• deal with the fixed appropriations first (interest on capital, salaries, interest on drawings);
• then share whatever is left (positive or negative) in the PSR.

The partnership agreement governs how profit is shared (the ratio, salaries, interest rates). If there is no agreement, or it is silent on a point, the Partnership Act 1890 default rules apply:

• profits and losses are shared equally;
• no interest on capital is allowed;
• no partners' salaries are allowed;
• no interest is charged on drawings;
• interest of 5% per annum is allowed on any loan a partner makes to the firm (a loan is different from capital).

A partner's loan to the firm is treated as a business expense (interest in the income statement), not an appropriation — unlike interest on capital. Knowing the defaults matters when an exam scenario says 'there is no partnership agreement' or 'the agreement is silent as to…'.