Accounting for partnerships
The appropriation account
Partners share profits under a partnership agreement. The appropriation account starts with net profit, deducts partners' salaries and interest on capital, adds interest charged on drawings, and divides the residual profit in the agreed ratio. Items in the appropriation account are distributions of profit, not expenses of the business.
Capital and current accounts
Under the fixed capital method, capital accounts change only on admission, retirement or revaluation; drawings, salary, interest on capital and the profit share are recorded in each partner's current account. Under the fluctuating method everything goes through capital. The balance sheet shows capital plus or minus current account balances.
Traps
- Deducting interest on drawings; it is added to the profit available for appropriation.
- Charging partners' salaries as an expense in the profit and loss account.
- Sharing the original profit rather than the residual profit.
- Omitting goodwill on admission; a new partner normally pays for a share of goodwill and the existing partners are credited.
- Ignoring a change in the profit-sharing ratio, which needs the old ratio for the period before the change.
Worked example
Net profit P60,000; partners' salaries P12,000; interest on capital P5,000; interest on drawings P1,000. Residual = 60,000 − 12,000 − 5,000 + 1,000 = P44,000, shared 3:2, giving P26,400 and P17,600.