Profit and loss appropriation account

Profit and loss appropriation account

The profit and loss appropriation account is an extension of profit and loss account prepared for the purpose of adjusting the transactions relating to amounts due to and amounts due from partners. It is nominal account in nature. It is credited with net profit, interest on drawings and it is debited with interest on capital, salary and other remuneration to the partners. The balance being the profit or loss is transferred to the partners’ capital or current account in the profit sharing ratio.

Format of Profit and loss appropriation account

The following is the format of profit and loss appropriation account:

*Amount of profit transferred from profit and loss account.

Illustration 21

Arulappan and Nallasamy are partners in a firm sharing profits and losses in the ratio of 4:1. On 1st January 2018, their capitals were ₹ 20,000 and ₹ 10,000 respectively. The partnership deed specifies the following:

a)     Interest on capital is to be allowed at 5% per annum.

b)    Interest on drawings charged to Arulappan and Nallasamy are ₹ 200 and ₹ 300 respectively.

c)     The net profit of the firm before considering interest on capital and interest on drawings amounted to ₹ 18,000.

Give necessary journal entries and prepare Profit and loss appropriation account for the year ending 31st December 2018. Assume that the capitals are fluctuating.

Solution

Dr. Profit and loss appropriation account for the year ended 31st December 2018 Cr.

Illustration 22 

Durai and Velan entered into a partnership agreement on 1st April 2018, Durai contributing ₹ 25,000 and Velan ₹ 30,000 as capital. The agreement provided that:

a)     Profits and losses to be shared in the ratio 2:3 as between Durai and Velan.

b)    Partners to be entitled to interest on capital @ 5% p.a.

c)     Interest on drawings to be charged Durai: ₹ 300 Velan: ₹ 450

d)    Durai to receive a salary of ₹ 5,000 for the year, and

e)     Velan to receive a commission of ₹ 2,000

During the year, the firm made a profit of ₹ 20,000 before adjustment of interest, salary and commission. Prepare the Profit and loss appropriation account.

Solution

Illustration 23

Richard and Rizwan started a business on 1st January 2018 with capitals of ₹ 3,00,000 and ₹ 2,00,000 respectively.

According to the Partnership Deed

a)     Interest on capital is to be provided @ 6% p.a.

b)    Rizwan is to get salary of ₹ 50,000 per annum.

c)     Richard is to get 10% commission on profit (after interest on capital and salary to Rizwan) after charging such commission.

d)    Profit-sharing ratio between the two partners is 3:2.

During the year, the firm earned a profit of ₹ 3,00,000.

Prepare profit and loss appropriation account. The firm closes its accounts on 31st December every year.

Solution

Dr. Profit and loss appropriation account for the year ended 31st December 2018 Cr.

Note:

Calculation of commission:

Profit before commission = 3,00,000 – (50,000+30,000) = ₹ 2,20,000

Commission = Net profit before commission × Rate of commission / (100 + Rate of commission)

Commission = 2,20,000 × 10/110  = ₹ 20,000