In the stated model, a partner’s salary is not an expense: it is part of how the profit is shared. It is deducted in the appropriation account and credited to that partner’s current account, after the net profit has been worked out.
This lesson sits in partnership accounting and builds on allocating profit by agreement.
Why is salary an appropriation?
Employees are paid for work, and that pay is an expense. Partners own the business, so the agreement rewards a partner who does more work by giving them a fixed amount before the ratio is applied.
Because it is an appropriation, it does not reduce the net profit in the income statement. The net profit stays the same, and the appropriation account shows how the whole figure is shared.
How to include a salary, step by step
- Start with net profit from the income statement, unchanged by any partner salary.
- Deduct the salary in the appropriation account.
- Find the residual profit by subtracting any other appropriations from the profit.
- Share the residual in the profit-sharing ratio.
- Add each partner’s salary and share to give their total, and check the totals equal the net profit.
Worked example
Farah and Kumar run a consultancy. Net profit is RM54,000. Farah has a salary of RM14,000, and the rest is shared Farah 3 : Kumar 2.
| Appropriation account | RM |
|---|---|
| Net profit | 54,000 |
| Salary: Farah | (14,000) |
| Residual profit | 40,000 |
| Share: Farah (3/5) | 24,000 |
| Share: Kumar (2/5) | 16,000 |
One part = RM40,000 ÷ 5 = RM8,000. Farah RM24,000 and Kumar RM16,000.
Totals: Farah RM14,000 + RM24,000 = RM38,000. Kumar RM16,000.
Check: RM38,000 + RM16,000 = RM54,000, the net profit. ✓ In the ledger, credit Farah’s current account RM38,000 in total and Kumar’s RM16,000.
When the salary is larger than the profit
Suppose the net profit is RM10,000, Farah’s salary is RM12,000 and the rest is shared equally. The residual is RM10,000 − RM12,000 = −RM2,000, so each partner bears a loss of RM1,000.
Farah’s total is RM12,000 − RM1,000 = RM11,000. Kumar’s total is −RM1,000. Check: RM11,000 − RM1,000 = RM10,000. ✓
The mistake to watch for
A common slip is to share the profit and then add the salary on top, so more than the net profit is distributed.
Mistaken answer: Farah = 3/5 × RM54,000 + RM14,000 = RM32,400 + RM14,000 = RM46,400. Kumar = 2/5 × RM54,000 = RM21,600.
The totals are RM46,400 + RM21,600 = RM68,000, which is RM14,000 more than the profit available.
The correction is to take the salary out first and share only the residual. A final check that the partners’ totals equal the net profit exposes this at once.
Check yourself
Work these on paper first, then open each answer.
1. Net profit is RM30,000. Lina has a salary of RM6,000, and the rest is shared Lina 2 : Ong 1. Find each partner’s total.
Show answer
Residual = RM30,000 − RM6,000 = RM24,000. One part = RM24,000 ÷ 3 = RM8,000. Lina’s share RM16,000, Ong’s RM8,000.
Lina RM6,000 + RM16,000 = RM22,000. Ong RM8,000. Check: 22,000 + 8,000 = 30,000.
2. Which side of the appropriation account does a partner’s salary appear on, and which account receives the matching credit?
Show answer
It is a deduction (debit) in the appropriation account, and the matching credit goes to the partner’s current account.
3. Hari’s agreed salary is RM12,000 and he takes RM1,000 in cash each month. What are the two entries on his current account?
Show answer
Salary: credit RM12,000 (appropriation). Drawings: debit RM12,000 (12 × RM1,000). The two cancel out, so these entries leave his balance unchanged. His share of the residual profit and any interest decide how the balance moves.
Where this leads next
Next, interest on drawings adds a further item to the appropriation account. The ledger trainer can check each posting, and the percentage-base explorer helps when interest appears.
If partnership questions leave you unsure whether a figure is an expense or an appropriation, our teachers can walk through it in online one-to-one Accounting tuition.