Profit and Loss Appropriation Account

A partnership's ordinary Profit and Loss Account, prepared exactly as for a sole proprietorship, arrives at the firm's Net Profit (or Net Loss) for the year. But a partnership has one job left that a sole proprietorship does not: that net profit belongs to more than one owner, and must be divided among them strictly according to the partnership agreement (or, in its absence, the statutory default rules of Section 13). This dividing-up is done in a separate account, prepared immediately after the Profit and Loss Account, called the Profit and Loss Appropriation Account.

Why it is prepared separately

Interest on capital, a partner's salary, and interest on drawings are NOT ordinary trading expenses or incomes of the business in the way rent or commission received are — they are internal arrangements about how the firm's own profit is shared among its owners. Keeping them out of the Profit and Loss Account, and routing them instead through a separate Appropriation Account, keeps the true trading Net Profit clearly distinguished from how that profit is subsequently divided.

Typical items in a Profit and Loss Appropriation Account

Debit side (appropriations OUT of profit):

• Interest on Partners' Capital
• Partners' Salary / Commission
• Any transfer to a General Reserve (if the deed requires one)
• Balance of profit transferred to partners' Capital/Current Accounts, in the agreed profit-sharing ratio

Credit side:

• Net Profit brought down from the Profit and Loss Account
• Interest on Partners' Drawings (drawings reduce the funds a partner leaves available to the firm, so interest charged on them is treated as an INCOME of the firm, entering through this account)

Format of the Profit and Loss Appropriation Account