Prepare a partnership appropriation account
Allocate partnership profit under an agreement using interest on capital and drawings, partner salaries and a profit-sharing ratio.
Section 5.2 · Partnerships
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What determines the partners' profit-sharing ratio in a question?
What you will learn
- Explain the purpose and contents of a partnership agreement
- Explain advantages and disadvantages of forming a partnership
- Prepare an appropriation account and calculate partners' profit shares
Use the partnership agreement
A partnership agreement records how partners will work together and how financial matters are handled. It may specify capital contributions, profit-sharing ratio, partner salaries, interest on capital and drawings, decision responsibilities and procedures for resolving disputes.
Advantages of a partnership can include shared skills, capital and workload. Disadvantages can include shared profit, shared decisions, disputes and partners bearing business risk. An agreement reduces ambiguity; do not assume a legal default ratio without a stated jurisdiction or question rule.
Separate expenses from appropriation
The partnership appropriation account shows how the period's profit is allocated between partners under their agreement. Interest on a partner's loan is a finance expense in the statement of profit or loss before appropriation. Interest on capital, partner salaries, interest on drawings and the profit-sharing ratio are dealt with in the appropriation account according to the agreement.
Add interest on drawings back when finding the residual profit available for appropriation. Allocate the residual in the agreed ratio; do not divide the full profit again after salaries and interest on capital have already been credited.
Pause and explain
Profit is $24,000; salaries total $4,000 and interest on capital totals $2,000. What remains before applying the ratio if there is no interest on drawings?
Worked example
Partnership profit before appropriation is $30,000. A and B receive interest on capital of $1,200 and $800; A has a salary of $5,000; B is charged $300 interest on drawings. Residual profit is shared 2:1. Calculate each share and amount credited before the drawings-interest charge.
Show the worked solution
- Residual divisible profit = 30,000 + 300 − 1,200 − 800 − 5,000 = $23,300.
- A's share = 2/3 × 23,300 = $15,533.33; B's share = 1/3 × 23,300 = $7,766.67.
- A's credits before drawings interest = 1,200 + 5,000 + 15,533.33 = $21,733.33. B's credits before the charge = 800 + 7,766.67 = $8,566.67; debit B's current account $300 drawings interest.
Answer Residual share: A $15,533.33 and B $7,766.67. A's appropriation credits total $21,733.33; B's credits total $8,566.67 before the $300 interest-on-drawings debit.
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Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A and B share profit 3:2. Profit before appropriation is $42,000; salaries are A $6,000 and B $4,000; interest on capital totals $5,000; interest on drawings is $1,000. Find residual profit and each residual share.
Give me a hint
Add interest on drawings to profit, deduct salaries and capital interest, then use the agreed ratio.
Compare my reasoning
- Residual = 42,000 + 1,000 − 6,000 − 4,000 − 5,000 = $28,000.
- Total ratio parts = 3 + 2 = 5; each part = 28,000 ÷ 5 = $5,600.
- A's residual share = $16,800; B's = $11,200.
Residual profit is $28,000; A receives $16,800 and B $11,200 of the residual. The $1,000 interest on drawings is charged to the relevant partner account.
Look for these in your work
- Residual correct
- Ratio applied
- Interest-on-drawings treatment stated
A partner's loan of $20,000 carries 6% interest. Explain where the $1,200 annual interest is recorded and how it differs from interest on capital.
Give me a hint
A loan is an amount the business must repay; capital is the partner's ownership contribution.
Compare my reasoning
- Loan interest = 6% × 20,000 = $1,200.
- Charge the interest as a finance expense before determining partnership profit for appropriation.
- Interest on capital is an agreed appropriation of profit, not the cost of borrowing the loan.
Charge $1,200 loan interest as a finance expense before appropriation. Interest on capital is a separate agreed distribution of profit.
Look for these in your work
- Calculation correct
- Expense placement correct
- Loan/capital distinction clear
Give three matters a partnership agreement can specify and one reason a written agreement is useful.
Give me a hint
Consider funding, work, decision-making and distribution arrangements.
Compare my reasoning
- It can state each partner's capital contribution and responsibilities.
- It can set salaries, interest on capital or drawings, profit ratio and decision procedures.
- A written agreement gives partners a reference when expectations differ; it does not remove the need to follow applicable law.
A written agreement can specify contributions, responsibilities, salaries, interest, profit ratio and decisions. It helps reduce disputes by making expectations clear, subject to applicable law.
Look for these in your work
- Three valid terms
- Purpose explained
- Legal context qualified
Common mistakes
- Treating interest on a partner loan as interest on capital
- Sharing all profit before agreed salaries or capital interest
- Forgetting that interest on drawings reduces that partner's current account
- Using an unstated legal default ratio
What can you explain now?
Where is interest on a partner's loan normally charged?
Compare with the explanation
As a finance expense before appropriation
Loan interest is a cost of borrowing, not a distribution of profit to an owner.
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Make it stick
Why is a partner's loan interest treated differently from interest on capital?
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