Meaning of Charge Against profits
All the items which go to firms profit and loss A/c are charge against profits. These are called charge as these are to be paid whether the firm earns profits or incur losses. These items are deducted from the Revenue from operations (Sales) of firm to find the Net profit or loss of the firm
Examples of Charge against profits - Rent paid to partner, Interest on partner’s loan, Managers Commission, Interest on Capital (If Question says it is a charge), Interest on Loan by firm to partner
Meaning of Appropriation of Profits
Once the firm determines its Net profit or Loss then it is to be distributed among the partners. The distribution of profits or losses among the partners is known as appropriation of profits. All the items which are entered in Profit and Loss Appropriation A/c are considered appropriation of profits.
Examples of appropriation of profits - Salary to partners, Interest on capital, Commission to partners, Transfer to General Reserve, Interest on Drawings
Difference between Charge against profits and appropriation of profits
| Basis | Charge against profits | Appropriation of profits |
| Nature | Deduction from revenue to determine net profit/loss | Distribution of net profit among partners |
| When made/Paid | Done whether profit or loss | Done only in case of profits |
| Recording | Debited to P&L A/c | Debited to P&L Appropriation A/c |
| Priority | Done before appropriation | Done after accounting for all charges |
| Example | Rent paid to partner, Interest on partner’s loan, Managers Commission, Interest on Capital (If Question says it is a charge), Interest on Loan by firm to partner | Salary to partners, Interest on capital, Commission to partners, Transfer to General Reserve, Interest on Drawings |