BOOKKEEPING MASTER

Simplifying Foundations of Accountancy & Bookkeeping for Class XI & XII

CLASS XII CHAPTER 1(B) PROFIT AND LOSS APP ACCOUNT

Chapter 1: Accounting for Partnership - Basic Concepts

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5. Distribution of Profit: Profit and Loss Appropriation Account

The profits and losses of the firm are distributed among the partners in an agreed ratio. However, if the partnership deed is silent, the firm's profits and losses are to be shared equally by all the partners.

In a sole proprietorship, the profit or loss is transferred directly to the capital account of the proprietor. In a partnership, however, certain adjustments such as interest on drawings, interest on capital, salary to partners, and commission to partners are required to be made. For this purpose, it is customary to prepare a Profit and Loss Appropriation Account of the firm.

What is the Profit and Loss Appropriation Account?

This account is merely an extension of the Profit and Loss Account of the firm. It shows exactly how the profits are appropriated or distributed among the partners. All adjustments in respect of partner's salary, partner's commission, interest on capital, interest on drawings, etc. are made through this account. It starts with the net profit/net loss as per the Profit and Loss Account.

Golden Rule: In case the firm suffers a loss, no interest on capital, salary, or remuneration is to be allowed to partners.

Journal Entries for Appropriation

Before preparing the ledger account, students must thoroughly understand the journal entries required for these adjustments.

1. Transfer of the balance of Profit and Loss Account

(a) If Profit and Loss Account shows a credit balance (net profit):
Profit and Loss A/c ... Dr.
    To Profit and Loss Appropriation A/c

(b) If Profit and Loss Account shows a debit balance (net loss):
Profit and Loss Appropriation A/c ... Dr.
    To Profit and Loss A/c

2. Interest on Capital

(a) For Allowing interest on capital:
Interest on Capital A/c ... Dr.
    To Partner's Capital/Current A/cs (individually)

(b) For transferring interest on capital to Profit and Loss Appropriation Account:
Profit and Loss Appropriation A/c ... Dr.
    To Interest on Capital A/c

3. Interest on Drawings

(a) For charging interest on drawings to partners' capital accounts:
Partners Capital/Current A/c's (individually) ... Dr.
    To Interest on Drawings A/c

(b) For transferring interest on drawings to Profit and Loss Appropriation Account:
Interest on Drawings A/c ... Dr.
    To Profit and Loss Appropriation A/c

4. Partner's Salary

(a) For Allowing partner's salary to partner's capital account:
Salary to Partner A/c ... Dr.
    To Partner's Capital/Current A/c's (individually)

(b) For transferring partner's salary to Profit and Loss Appropriation Account:
Profit and Loss Appropriation A/c ... Dr.
    To Salary to Partner's A/c

5. Partner's Commission

(a) For crediting commission allowed to a partner, to partner's capital account:
Commission to Partner A/c ... Dr.
    To Partner's Capital/Current A/c's (individually)

(b) For transferring commission allowed to partners to Profit and Loss Appropriation Account:
Profit and Loss Appropriation A/c ... Dr.
    To Commission to Partners Capital/Current A/c

6. Share of Profit or Loss after appropriations

(a) If Profit:
Profit and Loss Appropriation A/c ... Dr.
    To Partner's Capital/Current A/c's (individually)

(b) If Loss:
Partner's Capital/Current A/c (individually) ... Dr.
    To Profit and Loss Appropriation A/c

📝 Numerical Master Guide: The Appropriation Account

Proforma of Profit and Loss Appropriation Account

Dr. Particulars Amount (Rs.) Cr. Particulars Amount (Rs.)
Profit and Loss (if there is loss) XXX Profit and Loss (if there is profit) XXX
Interest on Capital XXX Interest on Drawings XXX
Salary to Partner XXX Partners' Capital/Current Accounts (distribution of Loss) XXX
Commission to Partner XXX
Partners' Capital/Current Accounts (distribution of profit) XXX
Total XXXX Total XXXX

Standard Practical Numerical

The Problem:

Amit, Babu and Charu set up a partnership firm on April 1, 2019. They contributed Rs. 50,000, Rs. 40,000 and Rs. 30,000, respectively as their capitals and agreed to share profits and losses in the ratio of 3:2:1.

  • Amit is to be paid a salary of Rs. 1,000 per month.
  • Babu is to receive a Commission of Rs. 5,000.
  • Interest is to be allowed on capital at 6% p.a.
  • The drawings for the year were Amit Rs. 6,000, Babu Rs. 4,000 and Charu Rs. 2,000.
  • Interest on drawings was charged as Rs. 270 on Amit's drawings, Rs. 180 on Babu's drawings and Rs. 90 on Charu's drawings.

The net profit as per Profit and Loss Account for the year ending March 31, 2020 was Rs. 35,660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.

Solution: Profit and Loss Appropriation Account

Dr. Particulars Amount (Rs.) Cr. Particulars Amount (Rs.)
Amits' salary 12,000 Profit and Loss A/c (Net profit) 35,660
Babus commission 5,000 Interest on drawings:
Interest on Capitals:
  Amit (50,000 × 6%)
  Babu (40,000 × 6%)
  Charu (30,000 × 6%)
3,000
2,400
1,800     7,200 		  Amit
  Babu
  Charu
270
180
90     540
Share of profit transferred to Capital accounts:
  Amit (3/6 of 12,000)
  Babu (2/6 of 12,000)
  Charu (1/6 of 12,000)
6,000
4,000
2,000     12,000
Total 36,200 Total 36,200

Explanation of Working:
Total Credit side = Rs. 35,660 (Net Profit) + Rs. 540 (Total Interest on Drawings) = Rs. 36,200.
Total Debit side before profit sharing = Rs. 12,000 (Salary) + Rs. 5,000 (Commission) + Rs. 7,200 (Total Interest on Capital) = Rs. 24,200.
Divisible Profit = Rs. 36,200 - Rs. 24,200 = Rs. 12,000.
This Rs. 12,000 is shared in the ratio 3:2:1 among Amit, Babu, and Charu.

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Level Up Your Board Exam Prep!

SMART P/L APPROPRIATION
MASTER GAME

Ready to test your knowledge of the Indian Partnership Act, 1932? Adjust the profits, apply the rules, distribute the capital, and see if you can balance the books!

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Smart P/L Appropriation Calculator

1. Deed?
2. Result:
3. Amount (Rs.):
4. Partners:

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