Profit and Loss Appropriation Account

After the Profit and Loss Account shows the firm's net profit, a second account shows how that profit is distributed among the partners: the Profit and Loss Appropriation Account. It is an extension of the P&L Account, and starts with the net profit (or loss).

• Credit side: the net profit, and interest on drawings (charged to partners, so it adds to the profit to be shared).
• Debit side: interest on capital, salary and commission to partners, any transfer to reserve, and finally the shares of profit, in the profit sharing ratio.

What is left after all the appropriations is the divisible profit, shared in the partners' ratio.

Keep charges and appropriations apart. A charge must be paid whether there is profit or not, so it goes in the P&L Account, before profit is found: rent paid to a partner for using his building, interest on a partner's loan, a manager's commission. An appropriation is a share-out of profit, so it goes in the Appropriation Account.

In a year of loss, there is no profit to appropriate, so no interest on capital or salary is allowed to partners (unless the deed treats them as a charge).