What is the purpose of an appropriation account?

to show how the profit for the year is shared between the partners. It starts with the profit for the year.

How is interest on drawings treated in the appropriation account?

it is added to the profit for the year. The partners are charged, which increases the profit to be shared.

Where is interest on a partner's loan shown?

as an expense in the statement of profit or loss. A loan is not capital. Its interest is a cost of the business.

Residual profit is $30 000, shared 3 : 2 between Cy and Di. What is Di's share?

$12 000. Five parts of 6000. Di has two of them.

Which is a disadvantage of a partnership compared with a sole trader?

Profits have to be shared. The others are advantages.

Why might one partner be given a salary?

to reward extra work or responsibility. It is a share of profit, given before the rest is divided.

Partnerships and the appropriation account · Cambridge IGCSE Accounting

In plain words

A partnership is a business owned by two or more people. They pool their money and skills, and share the profit. How they share it is whatever they agreed, and the appropriation account is where the sharing is done.

7 things to know

Advantages of a partnership: more capital is available, the workload and responsibility are shared, and partners bring different skills.
Disadvantages: profits have to be shared, partners may disagree, decisions take longer, and the partners have unlimited liability for the debts of the business.
A partnership agreement sets out the capital each partner provides, how profits and losses are shared, and the rates of interest on capital, interest on drawings, partners' salaries and interest on partners' loans. It helps to prevent disputes.
The appropriation account shows how the profit for the year is shared between the partners.
Layout: profit for the year + interest on drawings − interest on capital − partners' salaries = residual profit. The residual profit is shared in the profit-sharing ratio.
Interest on capital rewards the partner who invests more. A salary rewards a partner who does more work. Interest on drawings discourages partners from taking out too much.
Interest on a loan from a partner is an expense in the statement of profit or loss. It is not in the appropriation account.

Worked example

Ana and Ben share profits 2 : 1. The profit for the year is $59 200. Interest on capital is $4000 for Ana and $2000 for Ben. Ben has a salary of $12 000. Interest on drawings is $500 for Ana and $300 for Ben. Find each partner's share of the residual profit.

Add interest on drawings: 59 200 + 500 + 300 = 60 000.
Deduct interest on capital, 6000, and the salary, 12 000: 60 000 − 18 000 = $42 000 residual profit.
Share 2 : 1, three parts of 14 000: Ana $28 000 and Ben $14 000.

Tips and tricks

Interest on drawings is added to the profit. It is a charge on the partners, so it leaves more to be shared.
A partner's salary is a share of profit, not an expense. It goes in the appropriation account, never with the wages.

6 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Partnerships and the appropriation account: 6 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

What is the purpose of an appropriation account?
- to calculate gross profit
- to show how the profit for the year is shared between the partners (the answer)
- to record the partners' drawings
- to list the assets of the partnership
It starts with the profit for the year.
How is interest on drawings treated in the appropriation account?
- it is added to the profit for the year (the answer)
- it is deducted from the profit for the year
- it is not shown
- it is shown as an expense
The partners are charged, which increases the profit to be shared.
Where is interest on a partner's loan shown?
- in the appropriation account
- as an expense in the statement of profit or loss (the answer)
- in the partner's capital account only
- it is not recorded
A loan is not capital. Its interest is a cost of the business.
Residual profit is $30 000, shared 3 : 2 between Cy and Di. What is Di's share?
- $10 000
- $12 000 (the answer)
- $15 000
- $18 000
Five parts of 6000. Di has two of them.
Which is a disadvantage of a partnership compared with a sole trader?
- More capital is available.
- The workload is shared.
- Profits have to be shared. (the answer)
- Partners bring different skills.
The others are advantages.
Why might one partner be given a salary?
- to pay less tax
- to reward extra work or responsibility (the answer)
- to reduce their capital
- to replace their drawings
It is a share of profit, given before the rest is divided.

6 questions

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Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

Partnerships and the appropriation account

Cambridge IGCSE Accounting 0452 · 8 marks · papermunch.org

Name ______________________________ Date ______________

State two items that would be included in a partnership agreement.[2]
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The profit-sharing ratio and the rate of interest on capital. (Also: partners' salaries, interest on drawings, the capital each partner provides.)
I got this one
The profit for the year is $36 000. Interest on capital totals $3000, one partner's salary is $8000, and interest on drawings totals $1000. Profits are shared equally between two partners. Calculate each partner's share of the residual profit.[4]
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$13 000 each. 36 000 + 1000 − 3000 − 8000 = 26 000, divided by 2.
I got this one
Explain why a partnership agreement may allow interest on capital.[2]
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To reward the partners who have invested more capital in the business.
I got this one

Answers: Partnerships and the appropriation account

1. The profit-sharing ratio and the rate of interest on capital. (Also: partners' salaries, interest on drawings, the capital each partner provides.)
2. $13 000 each. 36 000 + 1000 − 3000 − 8000 = 26 000, divided by 2.
3. To reward the partners who have invested more capital in the business.