XII ACCOUNTS

Q1. A, B and C set up a partnership firm on April 1, 2015. They contributed Rs.50,000; Rs.40,000 and
Rs.30,000 as their capitals and agreed to share profits and losses in the ratio of 3 : 2 :1. A is to be paid
a salary of Rs.1,000 per month and B, a commission of Rs.5,000. It is also provided that interest to be
allowed on capital @ 6% p.a. the drawings for the year were A Rs.6,000, B Rs.4,000 and C Rs.2,000.
Interest on drawings of Rs.270 was charged on A’s drawings, Rs.180 on B’s drawings and Rs.90 on
C’s drawings. The net profit as per profit and loss account for the year ending March 31 2015 was
Rs.35,660. Prepare the profit and loss appropriation account to show the distribution of profit among
the partners.

{Ans. Divisible Profit: 12,000, Balance c/d of A: 64,730, of B: 47,220 and of C: 31,710}

Q2. R and S were partners in a firm sharing profits in the ratio of their capitals contributed on
commencement of business which were Rs.80,000 and Rs.60,000. The firm started business on April
1 2016. According to the partnership agreement, interest on capital and drawings are 12% and 10%. R
and S are to get a monthly salary of Rs.2000 and Rs.3,000. The profits for year ended March 31, 2017
before making above appropriations was Rs.1,00,300. The drawings of R and S were Rs.40,000 and
Rs.50,000. Interest on drawings amounted to Rs.2,000 for R and Rs.2,500 for S.
Prepare profit and loss appropriation account and partner’s capital accounts?
Hint: Profit sharing Ratio is mention in First line of Question. (Capital contribution) mean capital
ratio is the Profit sharing ratio.

{Ans. Divisible Profit: 28,000 , Balance c/d of R: 87,600, of S : 62,700}

Q3. Shiv and Hari entered into partnership on 1st April, 2020, contributing Rs.5,00,000 and Rs.2,00,000
respectively. Hari also introduced Rs.1,00,000 as additional capital on 1st July, 2020. They agreed
to share profits and losses in the ratio of 3 : 2. Following information is provided regarding the
partnership:
(i) Shiv and Hari each are allowed a salary of Rs.5,000 per quarter.
(ii) Interest is to be allowed on Capitals @ 8% p.a. and charged on drawings at 10% p.a.
Drawings of Shiv and Hari during the year were Rs.12,000 and Rs.10,000 respectively. Profit as at
31st March, 2021 before the above mentioned adjustments was Rs.1,96,000.
Prepare:
(i) Necessary journal entries relating to appropriation of profits.
(ii) Profit and Loss Appropriation A/c, and
(iii)Partner’s Capital A/cs.
Ans. Books of Shiv and Hari
JOURNAL
Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)
2021
March Profit and Loss A/c Dr. 1,96,000
31 To Profit and Loss Appropriation A/c 1,96,000
(The transfer of Profit to Profit and Loss
Appropriation Account)
” Partner’s Salary A/c Dr.
To Shiv’s Capital A/c 40,000
To Hari’s Capital A/c 20,000
(Salary of partners) 20,000

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” Profit and Loss Appropriation A/c Dr.
To Partner’s Salary A/c 40,000
(The transfer of partner’s salaries to Profit and Loss 40,000
Appropriation Account)

” Interest on Capital A/c Dr.

To Shiv’s Capital A/c 62,000
To Hari’s Capital A/c 40,000
(The interest on partner’s Capitals) 22,000

” Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c 62,000
(The transfer of interest on Capital to Profit and Loss 62,000
Appropriation Account)

” Shiv’s Capital A/c Dr.

Hari’s Capital A/c Dr. 600
To Interest on Drawings A/c 500
(Interest on partner’s drawings) 1,100

” Interest on Drawings A/c Dr.

To Profit and Loss Appropriation A/c 1,100
(The transfer of interest on drawings to Profit and 1,100
Loss Appropriation Account)

” Profit and Loss Appropriation A/c Dr.

To Shiv’s Capital A/c 95,100
To Hari’s Capital A/c 57,060
(The transfer of credit balance of Profit and Loss 38,040
Appropriation Account to partner’s Capital Accounts)

PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. For the year ended 31st March, 2021 Cr.
Particulars Rs. Particulars Rs.
To Partner’s Salary: By Profit & Loss A/c
Shiv 20,000 - Being profit 1,96,000
Hari 20,000 40,000 By Interest on Drawings: (note 2)
To Interest on Capitals: (note 1) Shiv 600
Shiv 40,000 Hari 500 1,100
Hari 22,000 62,000
To Profit transferred to:
Shiv’s Capital A/c 57,060
Hari’s Capital A/c 38,040 95,100
1,97,100 1,97,100

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Dr. PARTNER’S CAPITAL ACCOUNTS Cr.
Date Particulars Shiv Hari Date Particulars Shiv Hari
2021 Rs. Rs. 2020 Rs. Rs.
March 31 To Cash 12,000 10,000 April 1 By Bank 5,00,000 2,00,000
March 31 To Interest July 1 By Bank …… 1,00,000
on Drawings 600 500 2021
March 31 To Balance March 31 By Salary 20,000 20,000
c/d 6,04,460 3,69,540 March 31 By Interest
on Capitals 40,000 22,000
March 31 By Profit &
Loss
Appropriat-
ion A/c 57,060 38,040
6,17,060 3,80,040 6,17,060 3,80,040

Note (1): Calculation of Interest on Capitals Rs.

Shiv On Rs.5,00,000 at 8% for 1year 40,000
Hari On Rs.2,00,000 at 8% for 1 year 16,000
On Rs.1,00,000 at 8% for 9 months 6,000
22,000

Interest on Capitals is recorded on the debit side of P &L Appropriation A/c, as it is an item of expense
for the firm. Interest on Capital is also recorded on the credit side of Capital Accounts, as it increases
the Capitals.

Note (2): In this question the dates of drawings are not given, therefore, interest on drawings has been
calculated for six months.
10 6
Hence, Interest on Shiv's drawings = 12, 000    Rs.600  
100 12
10 6
Interest on Hari’s drawings = 10, 000    Rs.500  
100 12
Interest on Drawings is recorded on the credit side of P &L Appropriation A/c, as it is an item of
income for the firm. Interest on Drawings is also recorded on debit side of Capital Accounts, as it
reduces the Capitals.

Q4. A , B and C are partners with capitals of Rs.5,00,000, 3,00,000 and Rs.2,00,000 on 1 April 2018
respectively.
Net profit before providing the following adjustment mentioned in Partnership Deed is Rs.6,00,000
1) 10% of profit transfer to Reserve Account.
2) Interest on capital should be 10% p.a.
3) Salary to A and B should be 4,000 p.m and 6,000 p.m. respectively.
4) C is entitled to commission of Rs. 2,000 p.m.
5) Their profit sharing ratio will be 2 :2:1.

The drawings of the partners A, B and C were Rs.60,000, Rs.50,000 and Rs.40,000.
Prepare Profit and loss Appropriation A/c and Partners’ Capital A/c?

{Ans. Divisible Profit : 2,96,000, Balance c/d of A: 6,56,400 , of B:4,70,400 of C:2,63,200}

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Q5. A, B and C were partners in a firm having capitals of Rs.60,000; Rs.60,000 and Rs.80,000
respectively. According to the partnership deed 10% of the profit is to be transferred to General
Reserve and the partners were entitled to interest on capital @ 5% p.a. C being the working partner
was also entitled to a salary of Rs.12,000 p.a. The profits were to be divided as follows :
(a) The first Rs.20,000 in proportion to their capitals.
(b) Next Rs.30,000 in the ratio of 5 : 3 : 2.
(c) Remaining profits to be shared equally.
The firm made a profit of Rs.1,80,000 for the year ended 31st March, 2019 before charging any of the
above items. Prepare the Profit & Loss Appropriation Account and pass necessary journal entry for
apportionment of profit.
Ans. PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2019 Cr.
Particulars Rs. Particulars Rs.
To General Reserve By Profit & Loss A/c
(10% of Rs.1,80,000) 18,000 (Net Profit as per P & L A/c) 1,80,000
To Interest on Capital (at 5% p.a.)
A’s Capital A/c
On Rs.60,000 3,000
B’s Capital A/c
On Rs.60,000 3,000
C’s Capital A/c
On Rs.80,000 4,000 10,000
To Salary (C) 12,000
To Profit transferred to:
A’s Capital A/c 51,000
B’s Capital A/c 45,000
C’s Capital A/c 44,000 1,40,000
1,80,000 1,80,000
JOURNAL ENTRY
(For Appropriation of Profit)
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
2019
March 31 Profit & Loss Appropriation A/c Dr. 1,40,000
To A’s Capital A/c 51,000
To B’s Capital A/c 45,000
To C’s Capital A/c 44,000
(Profit transferred to Capital Accounts)

Working Note: Profit after transfer to General Reserve, Interest on Capital and Salary:
Rs.1,80,000 – Rs.18,000 – Rs.10,000 – Rs.12,000 = Rs. 1,40,000

A (Rs.) B (Rs.) C (Rs.)

First Rs.20,000 in Capital Ratio i.e., 6 : 6 : 8 6,000 6,000 8,000
Next Rs.30,000 in 5 : 3 : 2 15,000 9,000 6,000
Remaining Rs.90,000 equally  30,000 30,000 30,000
51,000 45,000 44,000

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Attention
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.

Interest on Partner's Loan to the Firm:

Rate of Interest: If a partner has given loan to the firm, he is entitled to receive interest on such loan at an
agreed rate of interest. However, if there is no agreement as to the rate of interest, he is entitled to receive
interest on loan @ 6% per annum.

Nature of Interest: Interest on partner's loan is a charge against the profits and hence, such interest is
allowed whether there are profits or not.

Accounting Treatment: It is treated as a charge against the profits and hence interest on partner's loan
is debited to Profit &Loss A/c and not to Profit & Loss Appropriation A/c.

Always remember that interest paid on Partner's Loan is a charge against profits and hence will be debited to
Profit & Loss A/c, even if the firm incurs a loss.

Rent paid to a Partner: Like interest on partner's loan, rent paid to a partner is also treated as a charge
against profit and not an appropriation out of profit and hence it should be debited to Profit and Loss Account
and not to Profit and Loss Appropriation Account.

Rent paid to a partner is an expense incurred for using the property. Hence, it is a charge against profits and
will be debited to Profit & Loss A/c, even if the firm incurs a loss.

Distinction between Charge Against Profit and Appropriation out of Profit

Basis of Distinction Charge Against Profit Appropriation Out of Profit

1. Nature It indicates expenses to be deducted from It indicates distribution of net profit
profits while calculating net profit or loss. to various heads.

2. Recording It is debited to Profit and Loss Account. It is debited to Profit and Loss
Appropriation Account.
3. Necessary or not It is necessary to make charges against profits Appropriations are made only when
even if there is loss. there is profit.
4. Example Interest on partner’s loan and rent paid to a Interest on capital, partner's salary
partner. etc.

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