PROFIT AND LOSS APPROPRIATION ACCOUNT OF A PARTNERSHIP
This, as the name implies, is the account where either the profit or loss of the partnership business is shared between or among the partners as stipulated in the partnership agreement. The profit and loss appropriation account marks the beginning of the difference between the final accounts of a sole trader and that of a partnership. This is because while the sole trader does not share his profit with any-body, the profit of the partnership must be shared by the partners.
Table of Contents
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Some Terminologies in profit & Loss Appropriation Account of a partnership
- Drawings:- Partners can withdraw at regular or irregular intervals, from the sum they are entitled to at the end of the year. The total drawings is credited to the cash book and debited to current accounts.
- Interest on drawings:-This is the interest charged on drawings made by the partners. In order to discourage or reduce the amount of cash withdrawn, a fixed sum or % will be charged as interest. The interest on drawing will increase net profit and discourage drawings. It can be calculated on monthly basis.
Interest is calculated from the date the amount is withdrawn to the end of the financial year.
- Partners’ Salary: – The agreement made provision for salary to be paid to active partners. It is desirable to compensate the active partner for the day-to-day running of the business.
- Interest on Capitals: Partners contribute different amounts as capital. In order to compensate the partners for capital contributed, interest on capital is allowed.
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BALANCE SHEET OF A PARTNERSHIP BUSINESS
There is no significant difference between the balance sheet of a sole trader and that of a partnership. The only difference is on the display of capital accounts and current accounts of partners which will be illustrated in the formats below:-
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Format 1
Trading, profit and loss of A and B Enterprises for the year ended 31st December 2006
NÂ Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â N
Opening stock                                    x                 Sales                              x
Add Purchases                           x                          less Returns inwards        x       x
Add Carriage inwards                 x
X
Less Returns Outwards               x       x
Cost of goods available for sale      x
Less Closing stock                               x
Cost of goods sold                          x
Gross profit c/d                               x
XÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â x
Expenses
Wages and salaries                              x                 Gross profit b/d                     x
Depreciation of assets                         x                 Discounts received                     x
Sundry expenses                                 x
Bad debts                                           x
Interest on loan                                  x
Discount allowed                                 x
Carriage outwards                               x
Net profit c/d                                  x
X Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â X
Format 2
Profit and Loss Appropriation account A and B
NÂ Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â N
Partners salary                          x                 Net profit b/d                          x
Interest on capital: A       x                          Interest on drawings:
B       x       x                                    A       x
Share of profit                                                                 B       x       x
A (½ x)                 x
B (½ x)                 x       x                                                       __
XÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â x
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 Format 3
Balance sheet of A and B Enterprises as at 31st Dec 2006
NÂ Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â N
Capital accounts                              Fixed assets
A                x                 Furniture & fitting  x
B                x       x       Less depreciation   x       x
Current accounts                             Motor van                       x
AÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â x
B                x       x       Current assets
Current liabilities                            Stock                    x
Loan                               x                 Debtor                            x
Creditors                        x                 Bank                     x
Expenses owing               x       x       Cash in hand         x       x
XÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â x
Example
O and D are in partnership sharing profit and loss in the ratio 3:2. The following is the Trial Balance as at 31 December 2005
DRÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â CR
Capital        O                                                               100,000
DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50,000
Drawings: OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6,000
:Â DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5,000
Purchases                                120,000
Sales                                                                     200,000
Sales returns                               4,000
Purchases returns                                                     2,000
Stock at 1st January 2005Â Â Â Â Â Â Â Â Â Â Â 10,000
Carriage inwards                         1,200
Salaries and wages                    15,000
Bad debts                                   1,000
Office expenses                           2,400
Loan-Okafor                                                           14,000
Provision for doubtful debts                                          300
Discounts allowed                        1,150
Discounts received                                                      1,100
Building at cost                         30,000
Machinery at cost                     109,000
Cash at bank                               8,000
Motor van at cost                      50,000
Electricity                                       50
Provision for dep. on motor van                                10,000
Debtors                                    20,000
Creditor                                                                  10,000
Bills payable                                                              9,000
Bills receivable                          17,500
Carriage outwards                         500
Currents account: OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1,500
DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 3,000
400,900Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 400,900
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Additional Information
- Stock at close N 15,000
- Salaries and wages accrued N 1,000
iii.     Electricity prepaid N 20
- Interest on capital at 10%
- Interest on drawings at 5%
- Depreciate motor can 10% on cost
vii.    Partnership salary: O N 2,000
viii.    Provision for doubtful debts to be reduced to N 200
viiii.   O withdrew N 7,000 goods for own use
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You are required to:
- Prepare the Trading, Profit and loss account for the year ended 31 Dec, 2006.
- Partners’ capital account
- Balance sheet as at 31st Dec. 2006
Solution
Trading, Profit and Loss of O and D for the year ended 31st December 2006.
NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â N
Opening stock                           10,000                  Sales                                  200,000
Add purchases       120,000                                   Less Returns inward s              4,000
Add carriage inwards 1,200
121,200
Less Ret outwards     2,000
119,200
Less Goods withdrawn 7,000Â Â Â Â Â Â 112,200
Cost of Goods available for sale  122,200
Less closing stock                        15,000
Cost of goods sold                    107,200
Gross profit         c/d                       88,800
196,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 196,000
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Expenses                                                             Gross profit bld                 88,800
Salaries and wages (wk 1)            16,000               Discount received                    1,100
Decrease in provision for
Bad debts                                     1,000                   bad debts (wk 3)                 100
Office expenses                             2,400
Discount allowed                           1,150
Electricity (wk 4)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 30
Carriage outwards                            500
Depreciation-motor can (wk 2)Â Â Â Â Â Â Â 5,000
Net profit c/d                        63,920
90,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 90,000
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Appropriation account
NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â N
Net profit                                 63,920
Partner salary – O                     2,000          Interest on drawings:
Interest on capital:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 300
OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 10,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 250Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 550
DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5,000Â Â Â Â Â Â Â 15,000
Share of profit:
D Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 18,988
OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 28,482Â Â Â Â Â Â Â Â 47,470
64,470Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 64,470
Partnership Columnar current account
OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â D
NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â N
Drawings               6,000          5,000          Balance b/f            1,500          3,000
Int on drawings       300            250          Share of profit      28.482        18,988
Goods withdrawn   7,000         –                 Interest on capital 10,000          5,000
Balance c/d          28,692                 21,738                 Salary                    2,000             -____
41,982Â Â Â Â Â Â Â 26,988Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 41,982Â Â Â Â Â Â Â 26,988
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Bal b/d                28,692       21,738
Balance sheet as at 31st December 2006
NÂ Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â NÂ Â Â Â Â Â NN
Capital: OÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 100,000
DÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50,000Â Â Â Â Â Â Â Â 150,000Â Â Â Â Â Â Â Â Fixed assets
Building                    30,000     30,000
Current account:                                                       Machinery               109,100    109,100
O                                    28,682                           Motor van    50,000                   139,100
D                                    21,738        50,420         Less Depr.   15,000                     35,000
174,100
Current liabilities                                                    Current assets
Loan Okafor                      14,000                             Stock                      15,000
Creditors                          10,000                             Bank                         8,000
Bills payable                        9,000                             Debtors        20,000
Wages owing                      1,000 34,000                   Less provision   200  19,800
Bills receivable          17,500
Electricity prepaid          20         60,320
234,420Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 234,420
Workings
- Salaries and wages
Amount paid          15,000
+ Owing                 1,000
Profit and loss       16,000
- Depreciation: Motor van
10% x 50,000
Profit and loss       5,000
Accumulated depreciation = 10,000 + 5,000 = 15,000
- Provision for bad debts 4.      Electricity              50
Old provision                   300                          Less Prepaid              20
Less New provision          200                                Profit and loss       30
Profit and loss                 100
- Interest on capital: 6.      Share of profit
O : 10% x 100,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â O = 3/5 x 47,470 = 28,482
= 10,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â D = 2/5 x 47,470 = 18,988
D : 10% x 50,000
= 5,000
- Interest on drawings:
O : 5% x 6,000
= 300
D : 5% x 5,000
= 250
EVALUATION
- Explain (a) appropriation account (b)Â Â Balance sheet
- What is interest on capital?
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WEEKEND ASSIGNMENT
Use the following information to answer questions 1 – 5. A, B, and C are in partnership sharing profits and losses in the ratio 3:2:1 respectively. Their capital accounts are A: N60,000 B. N40,000 and C: N 30,000. Interest on capital is agreed at 5% p.a. interest on drawings is also agreed at 5% p.a. Their drawings for the year are: A: N 6,000 B: N 4,000 and C: N 3,000. The profit for the year before appropriation is N 30,000 C is entitled to a partnership salary of N2,000 p.a
- What is the total of A and B’s interest on capital? (a) N4,000 (b) N3,000 (c) N5,000
(d) N10,000
- What is the total of B and C’s interest on drawing? (a) N350 (b) N250, (c) N450
(d) N400
- Total interest on the partners’ capital for the year is (a) N7,000 (b) N6,000 (c) N6,500 (d) N5,500
- Total credit entries in the appropriation account is (a) N550 (b) N30,000 (c) N35,500
(d) N30,550
- Which of the following is not debited to the profit and loss appropriation account?
(a) C’s salary (b) Partner’s interest on capital (c) Share of profit (d) Share of loss
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THEORY
- Write short notes on (a) Interest on capital (b) Interest on drawing
- Give the double entries for the following in the final account of a partnership. (i) Interest on drawings N500 (ii) Partnership salary N3,000 (iii) Interest on capital N5,000 (iv) Share of profit N10,000
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GENERAL EVALUATION
- List five items that are debited in the sales ledger control account
- List five items that are credited in the purchases ledger control account
- List five subsidiary books from which the sales ledger control is compiled
- State five contents of the Appropriation Account of a partnership
- List five characteristics of depreciable assets
See also
ACCOUNTING SSS 3 SCHEME OF WORK