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.
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 In order to discourage or reduce the amount of cash withdrawn, a fixed sum or % will be charged as interest.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Interest is calculated from the date the amount is withdrawn to the end of the financial year.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.
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:-
Format 1
Trading, profit and loss of A and B Enterprises for the year ended 31st December 2006
N N N 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
X 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 X
Format 2
Profit and Loss Appropriation account A and B
N N N 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 __
X x
Format 3
Balance sheet of A and B Enterprises as at 31st Dec 2006
N N N N
Capital accounts Fixed assets
A x Furniture & fitting x
B x x Less depreciation x x
Current accounts Motor van x
A 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
X 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
DR CR
Capital O 100,000
D 50,000
Drawings: O 6,000
: D 5,000
Purchases 120,000
Sales 200,000
Sales returns 4,000
Purchases returns 2,000
Stock at 1st January 2005 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: O 1,500
D 3,000
400,900 400,900
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
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.
N N N 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 7,000 112,200
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
196,000 196,000
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) 30
Carriage outwards 500
Depreciation-motor can (wk 2) 5,000
Net profit c/d 63,920
90,000 90,000
Appropriation account
N N N N
Net profit 63,920
Partner salary – O 2,000 Interest on drawings:
Interest on capital: O 300
O 10,000 D 250 550
D 5,000 15,000
Share of profit:
D 18,988
O 28,482 47,470
64,470 64,470
Partnership Columnar current account
O D O D
N N N 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 -____
41,982 26,988 41,982 26,988
Bal b/d 28,692 21,738
Balance sheet as at 31st December 2006
N N N NN
Capital: O 100,000
D 50,000 150,000 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
234,420 234,420
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 100,000 O = 3/5 x 47,470 = 28,482
= 10,000 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) Balance sheet
- What is interest on capital?
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
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
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