5.2 Partnerships: The Appropriation Account

In a partnership, the partners agree to share the profits and losses in a specific ratio. The Appropriation Account is a crucial financial statement used to allocate profits or losses among the partners according to their agreed-upon profit-sharing ratio. It's essentially a summary of how the partnership's financial performance is distributed.

Purpose of the Appropriation Account

The primary purpose of the Appropriation Account is to:

• Distribute profits to the partners in proportion to their agreed-upon profit-sharing ratio.
• Allocate losses to the partners in proportion to their agreed-upon profit-sharing ratio. This ensures that each partner bears their fair share of the financial burden.
• Provides a clear record of the profit or loss for the accounting period and how it is being divided.
• Helps in determining the partners' financial returns for the period.

How the Appropriation Account is Prepared

The Appropriation Account is prepared at the end of the accounting period, after the Profit and Loss Account has been prepared. The net profit or net loss from the Profit and Loss Account is then transferred to the Appropriation Account.

The Appropriation Account shows the amount each partner receives or is required to contribute, based on their profit-sharing ratio.

Structure of the Appropriation Account

The Appropriation Account typically has the following format:

Partner	Profit-Sharing Ratio	Amount Received/Contribution
Partner A	$50:25:25	$XXX
Partner B	$50:25:25	$YYY
Partner C	$50:25:25	$ZZZ

Explanation of the table:

• Partner: The name of each partner in the partnership.
• Profit-Sharing Ratio: The agreed-upon ratio in which profits and losses are divided. This is expressed as a combination of fractions (e.g., $50:25:25).
• Amount Received/Contribution: The amount of profit or loss allocated to each partner, calculated by applying the profit-sharing ratio to the net profit or loss. If a partner has a loss, this amount will be a negative value.

Example

Consider a partnership with three partners: A, B, and C, with a profit-sharing ratio of $50:25:25. The partnership has a net profit of $10,000.

Calculation:

• Partner A's share: ($50 / (50 + 25 + 25)) * $10,000 = ($50 / 100) * $10,000 = $5,000
• Partner B's share: ($25 / 100) * $10,000 = $2,500
• Partner C's share: ($25 / 100) * $10,000 = $2,500

The Appropriation Account would show:

Partner	Amount Received
Partner A	$5,000
Partner B	$2,500
Partner C	$2,500

If the partnership had a net loss of $2,000, the calculations would be similar, but the amounts received would be negative.

Formula for calculating the amount allocated to each partner:

$$ \text{Amount} = \frac{\text{Net Profit/Loss} \times \text{Partner's Ratio}}{\text{Total Ratio}} $$

Understanding the Appropriation Account is essential for analyzing the financial performance of a partnership and determining the individual returns of each partner.