Profit and loss appropriation account

A Profit and Loss Appropriation Account is a financial statement that shows how the net profit or loss of a partnership is divided among the partners.
This account is a continuation of the profit and loss account and it is prepared in the same accounting period.
This account is divided into two parts: credit side and debit side. The profit from the profit and loss account is shown on the credit side, whereas the distribution of profit among partners is shown on the debit side.
The profit or loss for the year is adjusted for any interest on capital, salaries, or other amounts due to or from partners.

Interest on Capital

Interest on capital is an agreed rate of return on a partner’s capital invested in the business.
It is calculated at an agreed percentage on the opening capital balance of each partner and debited in the Profit and Loss Appropriation Account.
The account is credited to each partner’s capital account, and it is payable regardless of whether the firm makes a profit or loss.

According to the partnership agreement, partners may be entitled to salaries or commissions for their efforts to the business.
Any such salaries or commissions are treated as expenses and debited in the Profit and Loss Appropriation Account.
These payments are made before the remaining profit is divided among partners.

Residual profits, also known as divisible profits, are the profits that remain after all the appropriations have been made.
These profits are divided among partners in the agreed ratio as per the partnership agreement.
If there is no agreed ratio, then profits are shared equally among all partners.

Partners often draw money or goods from the firm for personal use. These are called drawings.
Drawings reduce the capital account of partners and are deducted from the relevant partner’s capital account.
Drawings are not an expense, and so they do not appear in the Profit and Loss Appropriation Account.

Interest can be charged on drawings if it is agreed upon in the partnership agreement.
Interest on drawings is added back to the firm’s profits and is credited in the Profit and Loss Appropriation Account.
It is debited to each partner’s capital account.

This understanding of a Profit and Loss Appropriation Account will assist you in preparing and analysing this statement proficiently.