Profit and Loss Appropriation Account - Complete Guide

Profit and Loss Appropriation Account

Complete Guide to Appropriation of Profits in Partnership Firms

Partnership Accounting Process Flow

Trading Account

Determines Gross Profit/Loss

→

Profit & Loss Account

Determines Net Profit/Loss

→

Appropriation Account

Distributes Profit/Loss to Partners

What is Profit and Loss Appropriation Account?

The Profit and Loss Appropriation Account is a nominal ledger account that records the allocation of net profit or loss among partners in a partnership firm.

Every partnership firm follows this sequence:

Trading Account: Determines Gross Profit/Gross Loss
Profit and Loss Account: Determines Net Profit/Net Loss
Profit and Loss Appropriation Account: Distributes the Net Profit/Net Loss among the partners

Profit and Loss Appropriation Account Format

Below is a sample Profit and Loss Appropriation Account showing the key items:

Profit and Loss Appropriation Account
Dr. Particulars	Amount ₹	Cr. Particulars	Amount ₹
To Net Loss		By Net Profit
To Interest on Capital A B C		By Interest on Drawings A B C
To Partner Salary A B		By Loss Transferred A B C
To C's Commission
To General Reserve
To Profit Transferred A B C

Total		Total

Journal Entries for Appropriation

#	Transaction	Journal Entry
1	Interest on Capital/Salary/Commission/Profit Share	Interest on Capital/Salary/Commission A/c Dr. To Partner Capital A/c
2	Closing Entry for Above	Profit and Loss Appr A/c Dr. To Interest on Capital/Salary/Commission
3	Interest on Drawings	Partner Capital A/c Dr. To Interest on Drawings A/c
4	Share of Loss	Partner Capital A/c Dr. To Profit and Loss Appr A/c
5	Share of Profit	Profit and Loss Appr A/c Dr. To Partner Capital A/c
6	Transfer to Reserves	Profit and Loss Appr A/c Dr. To General Reserve A/c
7	Transfer of net Profit to P&L Appr A/c	Profit and Loss A/c Dr. To Profit and Loss Appr A/c
8	Transfer of net Loss to P&L Appr A/c	Profit and Loss Appr A/c Dr. To Profit and Loss A/c

Key Components of Appropriation Account

The below appropriations are made only if specified in the partnership agreement

Interest on Capital

Interest on Capital is an appropriation of profits that compensates partners who have contributed more capital.

Salary to Partners

Partners may receive salary or remuneration for managing the firm's affairs.

Commission to Partners

Partners may be allowed a certain percentage commission on sales or of Net Profit

Transfer to Reserves

The firm may decide to transfer part of profits to reserves for future use instead of distributing it to partners.

Interest on Drawings

Partners may be charged interest on drawings against profits

Important Considerations

All appropriations like interest on capital, partner salaries, commissions, etc. depend on the availability of profits:

Sufficient profits available: All appropriations are made.
In case of loss: No appropriation is made.
Profits are insufficient: Treated in a different manner (discussed in a separate article).

Questions on Profit & Loss Appropriation

Some common questions about Profit and Loss Appropriation Account:

What is the difference between Profit and Loss Account and Profit and Loss Appropriation Account? The P&L Account determines net profit/loss, while the Appropriation Account distributes it among partners.
Is interest on capital an expense or appropriation? Interest on capital is an appropriation of profit
When is partner salary payable in a partnership firm? Partner salary is payable only if specified in the partnership deed.
What happens if there's insufficient profit for appropriations? Discussed in a separate article
How are appropriations made when there's no partnership deed? In absence of a deed, all appropriations are made as per the Partnership Act.

Test Your Knowledge: MCQ Quiz

1. Profit and Loss Appropriation Account is prepared:

Before preparing Profit and Loss Account

After preparing Profit and Loss Account

Together with Trading Account

None of the above

Correct Answer: After preparing Profit and Loss Account
Explanation: The Profit and Loss Appropriation Account is prepared after determining the net profit/loss through the Profit and Loss Account, as it deals with the distribution of that profit/loss.

2. Interest on capital is provided to partners:

Only if there is profit

Even if there is loss

Only if mentioned in partnership deed

Both A and C

Correct Answer: Both A and C
Explanation: Interest on capital is provided only if there is profit and only if it's mentioned in the partnership deed. It is an appropriation of profit, not an expense.

3. Which of the following is not shown in Profit and Loss Appropriation Account?

Interest on capital

Partner's salary

Rent paid

Commission to partners

Correct Answer: Rent paid
Explanation: Rent paid is an expense that appears in the Profit and Loss Account, not in the Appropriation Account which deals only with distribution of profits.

4. In the absence of partnership deed, profits are shared:

Equally

In capital ratio

As per partners' decision

None of the above

Correct Answer: Equally
Explanation: According to the Indian Partnership Act, 1932, in the absence of a partnership deed, profits and losses are shared equally among all partners.

5. Which journal entry is correct for interest on drawings?

Interest on Drawings A/c Dr. To Partner's Capital A/c

Partner's Capital A/c Dr. To Interest on Drawings A/c

Profit and Loss Appropriation A/c Dr. To Interest on Drawings A/c

Interest on Drawings A/c Dr. To Profit and Loss Appropriation A/c

Correct Answer: Partner's Capital A/c Dr. To Interest on Drawings A/c
Explanation: Interest on drawings is a gain for the firm, so the partner's capital account is debited (decreasing their balance) and interest on drawings account is credited.

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