CH – PARTNERSHIP FUNDAMENTALS
Profit & Loss Appropriation Account
Profit and Loss Appropriation Account is an extension of the Profit and Loss Account of the
firm. It shows how the profits are appropriated or distributed among the partners.
Profit & Loss Appropriation Account for the year ended….
Particulars ₹ Particulars ₹
To Profit & Loss A/c (Net Loss) xxx By Profit & Loss A/c (Net Profit) xxx
To Interest on Capital By Interest on Drawings
X: X:
Y: xxx Y: xxx
To Partner’s Salaries / Commission By Loss transferred to Capital
X: (in PSR)
Y: xxx X:
To Reserve (Transfer) xxx Y: xxx
To Profit transferred to Capital
(in PSR)
X:
Y: xxx
xxx xxx
Appropriation of Profits vs Charge Against Profits
Appropriation of Profits Charge Against Profits
It means distribution of profits It means expense
Debited to P&L Appropriation A/c Debited to Profit & Loss A/c
Cannot exceed available profits Can exceed available profits
Eg: Partner’s Remuneration, Interest Eg: Interest on Partner’s Loan, Rent
on Capital, Distribution of Divisible paid to Partner, Manager’s
Profits Commission etc.
Accounting Treatment of Interest on Partner’s Loan (By Partner / To Partner) & Rent to
Paid to Partner
(A) Interest on Loan by Partner
(i) Interest on Loan by Partner A/c Dr. xxx
To Loan to Partner A/c xxx
(ii) Profit & Loss A/c Dr. xxx
To Interest on Loan by Partner A/c xxx
,(B) Interest on Loan to Partner
(i) Partner’s Capital / Current A/c Dr. xxx
To Interest on Loan to Partner A/c xxx
(ii) Interest on Loan to Partner A/c Dr. xxx
To Profit & Loss A/c xxx
(C) Rent Paid to Partner
(i) Rent A/c Dr. xxx
To Rent Payable A/c / Bank A/c xxx
(iii) Profit & Loss A/c Dr. xxx
To Rent A/c xxx
Maintenance of Partner’s Capital Accounts
2 Methods:
(1) Fixed Capital Method – Two Accounts are maintained:
(i) Fixed Capital A/c – Only additional capital introduced & withdrawal of capital
are recorded. It will always have credit balance.
(ii) Partner’s Current A/c – Remaining transactions like interest on capital,
interest on drawings, remuneration, profit/loss etc are recorded
(2) Fluctuating Capital Method – Only 1 Account i.e. Partner’s Capital A/c is maintained
in which ALL the transactions are recorded.
If question is silent, always assume that firm is following Fluctuating Capital Method.
Appropriation of Profit when Appropriations are More Than Available Profits
Step 1 – Determine the amount payable as appropriations to each partner as per
partnership deed normally.
Step 2 – Total the amount of appropriation for each partner separately.
Step 3 – Calculate the ratio of appropriation on the basis of Step 2.
Step 4 – Distribute the available profits in the ratio of appropriation calculated in Step 3.
Calculation of Interest on Capital
On opening balance of Capital A/c xxx
,[Opening Balance x Rate /100 x 12/12]
(+) On additional capital introduced xxx
[Amt introduced x Rate/100 x No. of months (Date of introduction to last date)/12]
(-) On capital withdrawn (Drawings against capital) xxx
[Amt withdrawn x Rate/100 x No. of months (Date of drawings to last date)/12]
Interest on Capital to be allowed for the year xxx
Note: If question says that Interest on Capital is to be treated as a charge, then it will be
allowed in full, irrespective of the available profits.
Note: If the firm follows Fixed Capital Method, then interest on capital will not be calculated
on Current A/c balance.
Calculation of Opening Capital
If in the question, closing capital is given, then opening capital has to be calculated for the
purpose of calculation of interest on capital.
Case (A): Fluctuating Capital Method
Closing Capital (given) xxx
Add: Drawings against profit xxx
Withdrawal of Capital xxx
Interest on drawings xxx
Loss transferred xxx
Less: Additional capital introduced (xxx)
Interest on capital allowed (xxx)
Salary/commission allowed (xxx)
Profit transferred (xxx)
Opening Capital xxx
Case (B): Fixed Capital Method
Closing Capital (given) xxx
Add: Withdrawal of Capital xxx
Less: Additional Capital introduced (xxx)
Opening Capital xxx
Calculation of Partner’s Commission
Case (A): On profits before charging such commission (assume if Q is silent)
, Commission = Profit x Rate/100
Case (B): On profits after charging such commission
Commission = Profit x Rate/(Rate + 100)
Calculation of Interest on Drawings
Case (A): Regular Drawings (i.e. Uniform Amount & Uniform Time Interval Between
Drawings)
Average period method is used:
Interest on Drawings = Total Drawings x Rate/100 x Avg. Period* x 1/12
* Avg. Period = [Time Left after 1st Drawings + Time Left after Last Drawings] / 2
Note: If date of drawings is not given in question, then take avg. period as 6 months (i.e.
half of total no. of months in the year) – CBSE Assumption
Case (B): Irregular Drawings
Simple method or Product method is used:
(i) Simple Method:
In this method, IOD is calculated individually for each drawings for the period the
amount is withdrawn.
(ii) Product Method:
IOD = Total of Product x Rate/100 x 1/12
* Product = Drawings x No. of Months for which Amt is withdrawn
Past Adjustment
Rectification of errors/omissions, after preparation and closing of final accounts, is known as
past adjustment. Errors (adjustments) relating to P&L Appropriation A/c are to be covered.
Method 1 – Passing Single Adjustment Entry using Partner’s Capital A/c / Current A/c
Profit & Loss Appropriation Account
Profit and Loss Appropriation Account is an extension of the Profit and Loss Account of the
firm. It shows how the profits are appropriated or distributed among the partners.
Profit & Loss Appropriation Account for the year ended….
Particulars ₹ Particulars ₹
To Profit & Loss A/c (Net Loss) xxx By Profit & Loss A/c (Net Profit) xxx
To Interest on Capital By Interest on Drawings
X: X:
Y: xxx Y: xxx
To Partner’s Salaries / Commission By Loss transferred to Capital
X: (in PSR)
Y: xxx X:
To Reserve (Transfer) xxx Y: xxx
To Profit transferred to Capital
(in PSR)
X:
Y: xxx
xxx xxx
Appropriation of Profits vs Charge Against Profits
Appropriation of Profits Charge Against Profits
It means distribution of profits It means expense
Debited to P&L Appropriation A/c Debited to Profit & Loss A/c
Cannot exceed available profits Can exceed available profits
Eg: Partner’s Remuneration, Interest Eg: Interest on Partner’s Loan, Rent
on Capital, Distribution of Divisible paid to Partner, Manager’s
Profits Commission etc.
Accounting Treatment of Interest on Partner’s Loan (By Partner / To Partner) & Rent to
Paid to Partner
(A) Interest on Loan by Partner
(i) Interest on Loan by Partner A/c Dr. xxx
To Loan to Partner A/c xxx
(ii) Profit & Loss A/c Dr. xxx
To Interest on Loan by Partner A/c xxx
,(B) Interest on Loan to Partner
(i) Partner’s Capital / Current A/c Dr. xxx
To Interest on Loan to Partner A/c xxx
(ii) Interest on Loan to Partner A/c Dr. xxx
To Profit & Loss A/c xxx
(C) Rent Paid to Partner
(i) Rent A/c Dr. xxx
To Rent Payable A/c / Bank A/c xxx
(iii) Profit & Loss A/c Dr. xxx
To Rent A/c xxx
Maintenance of Partner’s Capital Accounts
2 Methods:
(1) Fixed Capital Method – Two Accounts are maintained:
(i) Fixed Capital A/c – Only additional capital introduced & withdrawal of capital
are recorded. It will always have credit balance.
(ii) Partner’s Current A/c – Remaining transactions like interest on capital,
interest on drawings, remuneration, profit/loss etc are recorded
(2) Fluctuating Capital Method – Only 1 Account i.e. Partner’s Capital A/c is maintained
in which ALL the transactions are recorded.
If question is silent, always assume that firm is following Fluctuating Capital Method.
Appropriation of Profit when Appropriations are More Than Available Profits
Step 1 – Determine the amount payable as appropriations to each partner as per
partnership deed normally.
Step 2 – Total the amount of appropriation for each partner separately.
Step 3 – Calculate the ratio of appropriation on the basis of Step 2.
Step 4 – Distribute the available profits in the ratio of appropriation calculated in Step 3.
Calculation of Interest on Capital
On opening balance of Capital A/c xxx
,[Opening Balance x Rate /100 x 12/12]
(+) On additional capital introduced xxx
[Amt introduced x Rate/100 x No. of months (Date of introduction to last date)/12]
(-) On capital withdrawn (Drawings against capital) xxx
[Amt withdrawn x Rate/100 x No. of months (Date of drawings to last date)/12]
Interest on Capital to be allowed for the year xxx
Note: If question says that Interest on Capital is to be treated as a charge, then it will be
allowed in full, irrespective of the available profits.
Note: If the firm follows Fixed Capital Method, then interest on capital will not be calculated
on Current A/c balance.
Calculation of Opening Capital
If in the question, closing capital is given, then opening capital has to be calculated for the
purpose of calculation of interest on capital.
Case (A): Fluctuating Capital Method
Closing Capital (given) xxx
Add: Drawings against profit xxx
Withdrawal of Capital xxx
Interest on drawings xxx
Loss transferred xxx
Less: Additional capital introduced (xxx)
Interest on capital allowed (xxx)
Salary/commission allowed (xxx)
Profit transferred (xxx)
Opening Capital xxx
Case (B): Fixed Capital Method
Closing Capital (given) xxx
Add: Withdrawal of Capital xxx
Less: Additional Capital introduced (xxx)
Opening Capital xxx
Calculation of Partner’s Commission
Case (A): On profits before charging such commission (assume if Q is silent)
, Commission = Profit x Rate/100
Case (B): On profits after charging such commission
Commission = Profit x Rate/(Rate + 100)
Calculation of Interest on Drawings
Case (A): Regular Drawings (i.e. Uniform Amount & Uniform Time Interval Between
Drawings)
Average period method is used:
Interest on Drawings = Total Drawings x Rate/100 x Avg. Period* x 1/12
* Avg. Period = [Time Left after 1st Drawings + Time Left after Last Drawings] / 2
Note: If date of drawings is not given in question, then take avg. period as 6 months (i.e.
half of total no. of months in the year) – CBSE Assumption
Case (B): Irregular Drawings
Simple method or Product method is used:
(i) Simple Method:
In this method, IOD is calculated individually for each drawings for the period the
amount is withdrawn.
(ii) Product Method:
IOD = Total of Product x Rate/100 x 1/12
* Product = Drawings x No. of Months for which Amt is withdrawn
Past Adjustment
Rectification of errors/omissions, after preparation and closing of final accounts, is known as
past adjustment. Errors (adjustments) relating to P&L Appropriation A/c are to be covered.
Method 1 – Passing Single Adjustment Entry using Partner’s Capital A/c / Current A/c
