Accounting for Partnership Firm| Fundamentals – Part 2| Profit and Loss Appropriation Account (with PDF & Video Lecture) – Class 12 (2022-23)| CUET/NCERT
Division of Profits among Partners
Profit is distributed among all partners after taking all the adjustments into account like interest on capital interest on drawing, salary or commission of the partners, etc. After adjusting these items, the remaining amount will be distributed among partners.
Net Profit is the profit earned by an enterprise from its operating and non-operating activities. It is the net effect of operating and non-operating revenues and expenses that are charge against profit. It is determined by preparing Profit and Loss Account.
CHARGE means full amount is to be allowed whether there are profits or losses.
Profit and Loss Account
For the year ended
Particulars | Amount (₹) | Particulars | Amount (₹) |
To expenses A/c To Partner’s Property Rent To Partner’s Interest on Loan To Net Profit | *** *** *** *** | By Gross Profit b/d By Incomes A/c | *** *** |
Profit and Loss Appropriation Account
Divisible or Distributable Profit is the profit that is available for distribution among partners after allowing remuneration (Salary, Commission, etc.) to partners, interest on capitals, transfer to reserve and charging interest on drawings. After adjusting these items, the remaining amount will be distributed among partners.
It is determined by preparing Profit and loss Appropriation Account.
APPROPRIATION means items to be allowed only out of profits. It means that the amount (items) such as salary, interest on capital etc. cannot exceed the amount of profit.
Specimen of the Profit and Loss Appropriation Account
PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ended …
Dr. Cr.
Particulars | ₹ | Particulars | ₹ | ||
To | Interest on Capitals: | By | Profit and Loss A/c | $$$$ | |
A $$$ | (Net Profit transferred from Profit and | ||||
B $$$ | $$$$ | Loss Account) NET PROFIT AFTER | |||
To | Partners’ Salaries | CHARING ALL P&L ITEMS AND | |||
A $$$ | BEFORE ALL APPROPRIATION | ||||
B $$$ | $$$$ | ITEMS. | |||
To | Partners’ Commissions | By | Interest on Drawings: | ||
A $$$ | A $$$ | ||||
B $$$ | $$$$ | B $$$ | $$$$ | ||
To | Reserve | $$$$ | |||
To | Profit+ transferred to: | ||||
*A’s Capital A/c | |||||
**(or A’s Current A/c) | |||||
*B’s Capital A/c | |||||
**(or B’s Current A/c) | $$$$ | ||||
$$$$$ | $$$$$ |
Features of Profit and Loss Appropriation Account:
- It is prepared just after the Profit and Loss Account. Hence, it is an extension of Profit and Loss Account.
- It is prepared only by partnership firms.
- It is a Nominal Account.
- It shows how the net profit for the accounting period is appropriated (distributed) among the partners.
- Entries in this account are made giving effect to the Partnership Deed and/or the Indian Partnership Act, 1932.
Distinction between Charge against Profit and Appropriation out of Profit
Basis of Distinction | Charge Against Profit | Appropriation Out of Profit |
Nature | It indicates expenses to be deducted from profits while calculating net profit or loss | It indicates distribution of net profit to various heads. |
Recording | It is debited to Profit and Loss Account | It is debited to Profit and Loss Appropriation Account |
Necessary or Not | It is necessary to make charges against profits even if there is loss | Appropriations are made only when there is profit |
Example | Interest on partner’s loan and rent paid to a partner | Interest on capital, partner’s salary etc. |
Note: Any amount payable to a partner, such as salary, commission, interest on Capital etc. (except interest on Partner’s Loan and rent payable to a partner) is treated as appropriation of profit and not a charge against profit. Hence, these items are debited to Profit & Loss Appropriation A/c instead of Profit & Loss A/c |
Q1. Nikunj and Nitin are partners with capitals of ₹10,00,000 and ₹6,00,000 respectively. The profit for the year ended 31st March 2022 was ₹4,86,000 before allowing interest on partner’s loan. Show the distribution of profit after taking the following into consideration:
- Interest on Nikunj ‘s Loan of ₹1,50,000 to the firm provided on 1st April, 2021.
- Interest on capital to be allowed @ 5% p.a.
- Interest on drawings were Nikunj ₹1,800 and Nitin ₹1,200.
- Nitin is to be allowed a Commission of 2% on sales. Sales for the year were ₹30,00,000.
- 10% of the divisible profit is to be kept in a Reserve Account.
SOLUTION:
PROFIT AND LOSS ACCOUNT
Dr. for the year ended 31st March, 2022 Cr.
Particulars | ₹ | Particulars | ₹ |
To Interest on Nikunj ‘s Loan (1,50,000 x 6/100) To Profit transferred to Profit & Loss Appropriation A/c | 9,000 4,77,000 | By Profit before interest | 4,86,000 |
4,86,000 | 4,86,000 |
PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2022 Cr.
Particulars | ₹ | Particulars | ₹ | ||
To Interest on Capital : | By Profit & Loss A/c — | ||||
Nikunj | 50,000 | Net Profit (4,86,000 – 9,000) | 4,77,000 | ||
Nitin | 30,000 | 80,000 | By Interest on Drawings : | ||
To Commission to Nitin | 60,000 | Nikunj | 1,800 | ||
To Reserve A/c | 34,000 | Nitin | 1,200 | 3,000 | |
To Profit transferred to | |||||
Nikunj ‘s Capital A/c | 1,58,000 | ||||
Nitin ‘s Capital A/c | 1,58,000 | 3,16,000 | |||
4,80,000 | 4,80,000 |
Notes: If a partner has given loan to the firm and if the rate of interest on such loan has not been given in the question, then under the Partnership Act, interest at the rate of 6% p.a. is to be allowed on such loan. Since interest on partner’s loan is treated as a charge against profit, interest on Nikunj’s Loan is debited to Profit & Loss Account. Amount transferred to Reserve has been calculated at 10% of ₹3,40,000 (4,77,000 +3000 – 80,000 – 60,000) |
Q2. Nikunj and Nitin are partners sharing profit & loss equally.
- Loan given by the Nikunj to the firm on 1st July 2021 ₹ 2,00,000
- Loan given by the firm to Nitin on 1st October 2021 ₹1,00,000
- Rent of building ₹ 6,000 annually (Building given by Nikunj to the firm for business purpose)
Partnership deed provides Rent and interest on loan to Nitin @10% p.a. but silent on interest on Loan by Nikunj. Profit for the year ended 31st March 2022 was Rs.20,000. Profit/loss shared by the partners:
PROFIT AND LOSS ACCOUNT
Dr. for the year ended 31st March, 2022 Cr.
Particulars | ₹ | Particulars | ₹ |
To Interest on Nikunj ‘s Loan (2,00,000 x 6/100 x 9/12) To rent To Profit transferred to Profit & Loss Appropriation A/c | 9,000 6,000 10,000 | By Profit before interest By interest on loan received from Nitin (1,00,000 x 10/100 x 6/12) | 20,000 5,000 |
25,000 | 25,000 |
PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2022 Cr.
Particulars | ₹ | Particulars | ₹ | |
To Profit transferred to | By Profit & Loss A/c — Net Profit | 10,000 | ||
Nikunj ‘s Capital A/c | 5,000 | (20,000 +5,000 – 9,000 – 6,000) | ||
Nitin ‘s Capital A/c | 5,000 | 10,000 | ||
10,000 | 10,000 |
Q3. Nikunj and Nitin are partners with capitals of ₹10,00,000 and ₹6,00,000 respectively sharing profit in their capital ratio. Nikunj withdrew ₹1,50,000 and Nitin withdrew ₹1,00,000 during the year for their personal use. As per the partnership deed Interests on Drawings were ₹7,500 and ₹5000 respectively. There was a loss of ₹10,100 during the year. Nikunj and Nitin share of Profit/Loss?
PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2022 Cr.
Particulars | ₹ | Particulars | ₹ | |
By Profit & Loss A/c — Net loss | 10,100 | By Interest on Drawings : | ||
To Profit transferred to | Nikunj | 7,500 | ||
Nikunj ‘s Capital A/c | 1,500 | Nitin | 5,000 | |
Nitin ‘s Capital A/c | 900 | 2,400 | ||
12,500 | 12,500 |
Q4. Nikunj and Nitin are partners sharing profits in the ratio of 3 : 2. Nikunj is a non-working partners and contributes 20,00,000 as his capital. Nitin is a working partner of the firm. The Partnership Deed provides for interest on capital @ 8% p.a. and salary to every working partner @ ₹8,000 per month. Profit before providing for interest on capital and partner’s salary for the year ended 31st March, 2020 was 80,000. Show the distribution of profit.
Solution:
PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ended 31st March, 2020
Dr. Cr.
Particulars | Rs | Particulars | Rs |
To Nikunj ‘s Capital A/c (Interest on capital) | 50,000 | By Profit and Loss A/c (Net Profit) | 80,000 |
To Nitin’s Capital A/c (Salary) | 30,000 | ||
80,000 | 80,000 |
Note: Interest on Nikunj ‘s Capital = ₹20,00,000 x 8/100 = ₹1,60,000; Salary to Nitin = 8,000 x 12 = ₹96,000 Thus, Interest on Nikunj ‘s Capital + Salary to Nitin = 1,60,000 + 96,000 = ₹2,56,000. Since both interest on capital and salary to partners are appropriations and the profit available for distribution is 80,000, i.e., less than the amount of appropriations to be made, the available profit is distributed in the ratio of appropriations to be made to Nikunj and Nitin, i.e., ₹1,60,000 (interest on capital): 96,000 (salary), or 5 : 3. |
TIPS
- In case where appropriation such as interest on capital, salary of partners etc. is more than available profits will be distributed in the ratio of appropriations.
- Interest on partner’s loan is payable even if there are losses.
- When the partnership deed is silent upon profit sharing ratio, the profits are shared equally by the partners.
- Interest on Partners’ Loan and Rent Payable to a Partner are charge against profit therefore they will be shown in P/L A/c.
- Appropriation vs Charge
The words Appropriation and Charge must be differentiated and give the treatment of expenses accordingly.
CHARGE means full amount is to be allowed whether there are profits or losses.
APPROPRIATION means items to be allowed only out of profits. It means that the amount (items) such as salary, interest on capital etc. cannot exceed the amount of profit.
Interest on Partner’s Loan advanced to the firm is always charged against the profit whereas interest on capital may be charged against the profits or appropriation out of profits depending upon the nature of information given in the question i.e. as per partnership agreement. However, in the absence of any information about treatment of IOC, it is always treated as appropriation of profits.
Written By:-
Sarita Chugh
Sarita Chugh M.Com, B.Edan is Accounts and Economics teacher having more than 30+ years of experience. She is Edupreneur and founded Unique Learning Academy in 2004. She believes that every child has the right to affordable education.