Profit and Loss Appropriation A/c Partnership

 

As stated above, the net profit as shown by the profit and loss account of a partnership firm needs certain adjustments with regard to interest on capitals, interest on drawings, salary, commission to the partners, if provided, under the agreement. For this purpose, ‘Profit and Loss Appropriation Account’ may be prepared. This is merely an extension of the profit and loss account and is prepared to show how net profit is to be distributed among the partners.

This account is credited with net profit and interest on drawings, and debited with interest on capitals, salary or commission to partners. If, however, the profit and loss appropriation account shows a net loss, it will be shown on the debit side of the profit and loss appropriation account. After these adjustments have been made, the Profit and Loss Appropriation Account will show the amount of profit or loss, which shall be distributed among the partners in the agreed profit sharing ratio.

 

For preparing the profit and loss appropriation account, the following journal entries have to be recorded for various items:

 

For Interest on Capital

(i) For Crediting Interest on Capital to Capital/Current Account :

Interest on Capital a/c Dr.

Partners’ Capital/Current a/c

 

(ii) For transferring Interest on Capital to Profit and Loss Appropriation Account:

Profit and Loss Appropriation a/c Dr.

Interest on Capital a/c

 

For Interest on Drawings

(i) Interest on Drawings is a gain to the firm and is charged to Partner’s Capital/Current Account

Partners Capital/Current a/c Dr.

Interest on Drawings a/c

 

(ii) For transferring Interest on Drawings to Profit and Loss Appropriation Account, the following entry is to be recorded:

Interest on Drawings a/c Dr.

Profit and Loss Appropriation a/c

 

Partner’s Salary

(i) Salary allowed to a partner is a gain of the individual partner and charge against the profits of the firm as per partnership agreement. For this following entry is recorded:

Salary to Partner a/c Dr.

Partner Capital/Current a/c

 

(ii) For charging salary allowed to a partner:

Profit and Loss Appropriation a/c Dr.

Salary to partner a/c

 

 

Partner’s Commission

(i) Commission is an expense for the firm and a gain to the partner. For this, following entry is made:

Commission to partner a/c Dr.

Partner’s capital/current a/c

 

(ii) Commission paid to a partner is charged to Profit and Loss Appropriation account by recording the following entry:

Profit and Loss Appropriation a/c Dr.

Commission to partners a/c

 

For Transfer to Reserve:

Profit and Loss Appropriation a/c Dr.

Reserve

 

For share of Profit or Loss on Appropriation

If Profit:

Profit and Loss Appropriation a/c Dr.

Partner’s Capital/Current a/c

If Loss:

Partner’s Capital/Current a/c Dr.

Profit and Loss Appropriation a/c

 

The Profit and Loss Appropriation Account will appear as follows:

Partnership profit and loss account proforma

 

 

 

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