ACCOUNTING FOR

PARTNERSHIP FIRMS

Profit and Loss Appropriation

Account
Profit and Loss Appropriation Account

Profit and Loss Appropriation Account

Dr. Cr.
Particulars ₹ Particulars ₹
To Profit and Loss A/c xx By Profit and Loss A/c xx
(Net Loss transferred from Profit and (Net Profit transferred from Profit and
Loss Account) Loss Account)
To Interest on Capitals: By Interest on Drawings:
A xx A xx
B xx xx B xx xx
To Partner’s Salaries xx By Loss transferred to:
To Partner’s Commissions xx A Capital A/c or Current A/c xx
To Reserve xx B Capital A/c or Current A/c xx xx
To Profit transferred to:
A Capital A/c or Current A/c xx
B Capital A/c or Current A/c xx xx
xxx Xxx
 Features
Extension of the Profit and Loss Account

Prepared by the Partnership Firms

Shows the Appropriation of Net Profit

or Loss of the Accounting period.

Entries in this account are passed

giving effect to the Partnership Deed.
 Difference between Charge Against Profit and
Appropriation of Profit

Basis Charge Against Profit Appropriation of Profit

Nature It is an expense hence deducted It means distribution of net profit
from revenue to determine net for the year among partners under
profit or loss for the year different heads as per the
Partnership Deed.
Recording It is debited to Profit and Loss It is debited to Profit and Loss
A/c Appropriation A/c
Priority It is allowed before It is appropriated after accounting
Appropriation of Profit. of all charges.
Examples Rent paid to a partner, Interest Salary to Partners, Interest on
on Loan by partner etc Capital, Transfer of profit to
General Reserve,etc.
Journal Entries Relating to the Profit and
Loss Appropriation Account
Transfer of profit from Profit and Loss Account to Profit and
Loss Appropriation Account
Transfer of Loss from Profit and Loss Account to Profit and
Loss Appropriation Account
For Partner’s Salaries / Commission
For Allowing Interest on Capitals
For Charging Interest on Drawings
For Transfer to Reserve out of Profit
For Transfer of Credit Balance of Profit and Loss
Appropriation Account (being Divisible/Distribution Profit)
For Transfer of Debit Balance of Profit and Loss
Appropriation Account (Loss)
Profit and Loss A/c
To Profit and Loss Appropriation A/c
(Profit transferred)
Profit and Loss Appropriation A/c
To Profit and Loss A/c
(Profit transferred)
Partner’s Salaries / Commission A/c
To Partner’s Capital / Current A/c (individually)
(Salaries / Commission allowed to partners)
Profit and Loss Appropriation A/c
To Partner’s Salaries / Commission A/c
Interest on Capital A/c
To Partner’s Capital / Current A/c (individually)
Profit and Loss Appropriation A/c
To Interest on Capital A/c
Partner’s Capital / Current A/c (individually)
To Interest on Drawings A/c
Interest on Drawings A/c
To Profit and Loss Appropriation A/c
Profit and Loss Appropriation A/c
To Reserve A/c
Profit and Loss Appropriation A/c
To Partner’s Capital / Current A/c (individually)
Partner’s Capital / Current A/c (individually)
To Profit and Loss Appropriation A/c
Difference between Profit and Loss A/c &
Profit and Loss Appropriation A/c
Basis Profit and Loss Account Profit and Loss Appropriation Account
Preparation It is prepared after Trading A/c. It is prepared after Profit and Loss Account.
Therefore it starts with Gross Profit Therefore it starts with Net Profit(credit
(credit side)or Gross Loss (debit side)side) or Net Loss (debit side)
Objective To determine Net Profit earned or Net To show Appropriation of Net Profit, i.e.,
Loss incurred during the accounting distribution of Net Profit or Net Loss in the
year. accounting year among the partners.
Nature It is debited with the expenses (ChargeIt is debited with the items of Appropriation
Against Profit) and credited with of Profit (Salary/Commission to partners)
income (not being operating income). and credited with income (Interest on
Drawings).
Partnership Preparation of this account not guided Preparation of this account guided by
Deed by Partnership Deed Partnership Deed
Matching While preparing this account, Matching While preparing this account, Matching
Principle Principle is followed. Principle is not followed being not
applicable.
Example 1:
Solution 1:
Example 2:
Solution 2:
Profit and Loss Appropriation Account
Dr. Cr.
Particulars ₹ Particulars ₹
To Babul’s Salary 2,500 By Net Profit * 14,250
To Interest on Capitals:
Amitabh 3,000
Babul 1,800 4,800
Profit transferred to Partner’s
Capital A/c
Amitabh 4,170
Babul 2,780 6,950
14,250 14,250

*Note: Net Profit = 12,500 + 2500 (Babul’s Salary) = 15,000

Manager commission = 15000 x 5/100 = 750 (charge against profit)
Net Profit = 15,000 – 750 = 14,250 (Profit for Appropriation)
Example 3:
Appropriations are more than Available
Profit
Step1: Determine the amount payable as appropriation to each
as per Partnership Deed. For example, salary payable, interest
on capital, etc., payable to each partner is determined.
Step2: Total the amount of appropriation (as per Step1 above)
for each partner separately.
Step3: Ratio of the Appropriations (as per Step2 above) is the
ratio in which profit is appropriated.

[It should be kept in mind that no particular item like salary, commission, interest on
capital, etc., has priority over items of appropriation.]
 Example 4:
Ajay and Vijay are partners sharing profits in the ratio of 3:2. Ajay is a non-working partner and contributes ₹
20,00,000 as his capital. Vijay 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

Profit and Loss Appropriation Account

for the year ended 31st March,2020
Dr. Cr.
Particulars ₹ Particulars ₹
To Ajay’s Capital A/c (Interest on Capital) 50,000 By Profit and Loss A/c (Net Profit) 80,000
To Vijay’s Capital A/c (Salary) 30,000
80,000 80,000

Note:
Step1:
Interest on Capital= ₹ 20,00,000 x 8/100 = ₹ 1,60,000
Salary of Vijay = ₹ 8,000 x 12 = ₹ 96,000
Step2:
Interest on Capital + Salary of Vijay = ₹ 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.
Step3:
The available profit is distributed in the ratio of appropriation to be made to Ajay and Vijay, i.e.,
₹ 1,60,000 (interest on capital) : ₹ 96,000 (salary) or 5:3