# Need help with IGCSE Accounting Partnership questions

I thought interest on capital, interest on loan and partner's salary must all be deducted from the profit for the year in the appropriation account because all of them are paid by the business to the partners and they decrease the amount available to share, but the answer says C is correct.

For this question, I thought the answer was D, because for Quan:
interest on capital = $50 000 x 0.03 =$1 500,
annual salary = $6 000, profit share =$18 900 x ($50 000 /($100 000 +$50 000)) =$18 900 / 3 = $6 300 so in total,$1 500 + $6 000 +$6 300 = $13 800. But the answer says B is correct. Any help with spotting mistakes in my solution would be very much appreciated. Hello EK, Here is an explanation to your question: These two questions are related and touch on how you account for different items in a partnership. First thing to understand is the role or use of an appropriation account in a partnership. Here is a simple explanation; "An appropriation account is a special account prepared to show the distribution of profits/losses among the partners" and it is prepared after preparing P&L account. It's actually an extension of P&L. Question1: Only two items should appear as deductions in the appropriations account; interest on capital and partner's salary. Interest on loan should appear in the P&L as it affects the NET profit for the partnership. Drawings do not appear anywhere in the appropriation account. Instead, debit partners' current account and credit drawings account. However, INTEREST on drawings appear as a credit in the appropriation account. Thus, based on the choices given, the correct answer is indeed C. Question 2: When sharing profits in a partnership, salaries, interest on capital, interest on drawings and residual profit are credited in the respective partner's current account. However, there are some author's who state that interest on capital should be credited to a partner's capital account. So, based on the figures given, Quan's current account was credited with$10,300 computed as follows;
Interest on capital: 50,000*0.03 = 1,500
Annual Salary = 6,000
Profit share: (18,900-4500-6000)/3=2,800
So, total: 1,500 + 6,000 + 2,800 = 10,300
NB: before computing the profit share for each partner, you should deduct the total interest on capital for both partners ($4,500) and Quan's salary ($6,000). So the residual profit share is $8,400 ($18,900-4,500-6,000), from which Quan's share is $2,800 ($8,400/3).

Original post by Monoro
Hello EK,
Here is an explanation to your question:
These two questions are related and touch on how you account for different items in a partnership.
First thing to understand is the role or use of an appropriation account in a partnership. Here is a simple explanation;
"An appropriation account is a special account prepared to show the distribution of profits/losses among the partners" and it is prepared after preparing P&L account. It's actually an extension of P&L.

Question1: Only two items should appear as deductions in the appropriations account; interest on capital and partner's salary.
Interest on loan should appear in the P&L as it affects the NET profit for the partnership.
Drawings do not appear anywhere in the appropriation account. Instead, debit partners' current account and credit drawings account. However, INTEREST on drawings appear as a credit in the appropriation account.
Thus, based on the choices given, the correct answer is indeed C.

Question 2: When sharing profits in a partnership, salaries, interest on capital, interest on drawings and residual profit are credited in the respective partner's current account. However, there are some author's who state that interest on capital should be credited to a partner's capital account.
So, based on the figures given, Quan's current account was credited with $10,300 computed as follows; Interest on capital: 50,000*0.03 = 1,500 Annual Salary = 6,000 Profit share: (18,900-4500-6000)/3=2,800 So, total: 1,500 + 6,000 + 2,800 = 10,300 NB: before computing the profit share for each partner, you should deduct the total interest on capital for both partners ($4,500) and Quan's salary ($6,000). So the residual profit share is$8,400 ($18,900-4,500-6,000), from which Quan's share is$2,800 (\$8,400/3).

Hi Monoro,
Thank you very much for your detailed explanation.
I'm teaching accounting myself and it often gets rly confusing if I miss small details.
I perfectly understood your explanations, especially why interest on loan must not be included in the appropriation account. But I unfortunately still do not get why the interest on capital is not included as a deduction.
I get that C is the only option left if we cancel the other incorrect options, but don't get why option C does not include the interest on capital and it can be said it's a correct answer. I've always deducted both the interest on capital and the partner's salary from the net profit in the appropriation accounts and it worked.
(edited 1 year ago)
Hi Monoro,
Thank you very much for your detailed explanation.
I'm teaching accounting myself and it often gets rly confusing if I miss small details.
I perfectly understood your explanations, especially why interest on loan must not be included in the appropriation account. But I unfortunately still do not get why the interest on capital is not included as a deduction.
I get that C is the only option left if we cancel the other incorrect options, but don't get why option C does not include the interest on capital and it can be said it's a correct answer. I've always deducted both the interest on capital and the partner's salary from the net profit in the appropriation accounts and it worked.

Hi EK
What you have been doing (deducting interest on capital and partner's salary) is very correct.
However, question one takes the form of 'multiple choice' type of question where you have to select the correct choice. This means you have to apply elimination method to get the correct answer. So, as you have stated in your response, if you cancel out (eliminate) the incorrect options, you are left with option C. This does not mean that interest on capital is not deducted.
The key thing to note is that the answer is specific to this question only. In future, the tutor can vary the options as he/she wishes.
So, the fact that C is correct and does not have interest on capital should not bother you at all.
Original post by Monoro
Hi EK
What you have been doing (deducting interest on capital and partner's salary) is very correct.
However, question one takes the form of 'multiple choice' type of question where you have to select the correct choice. This means you have to apply elimination method to get the correct answer. So, as you have stated in your response, if you cancel out (eliminate) the incorrect options, you are left with option C. This does not mean that interest on capital is not deducted.
The key thing to note is that the answer is specific to this question only. In future, the tutor can vary the options as he/she wishes.
So, the fact that C is correct and does not have interest on capital should not bother you at all.

Yep, that makes sense. Tysm for your help I really appreciate it
Yep, that makes sense. Tysm for your help I really appreciate it

You are welcome.