Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed an

Numerical Questions · Q9

Q. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed an amount of Rs. 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2019 and March 31, 2020 were Rs. 40,000 and Rs. 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

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Concept understanding — Profit Appropriation Account

Profit Appropriation Account – A First Look

Think of a partnership firm as a group of friends who run a business together. At the end of the year, they have earned some profit. But before they split that profit among themselves, they must first settle certain obligations: pay interest on the capital each partner contributed, give a salary to a partner who works full-time, or pay a commission to a partner who brought in a special client. Only after these items are accounted for can the remaining profit be divided.

That is exactly what the Profit Appropriation Account does. It is not a separate ledger account in the double-entry system — it is an extension of the Profit and Loss Account. The Profit and Loss Account shows the net profit (or net loss) of the firm. The Profit Appropriation Account shows how that net profit is appropriated (distributed or allocated) among the partners and to various reserves.

Why does it matter?

Without an appropriation account, you would not know:

How much interest on capital each partner is entitled to.
Whether a partner’s salary or commission has been paid.
How much profit is transferred to the General Reserve.
What remains to be shared as profit among the partners.

In short, it answers the question: “We made Rs 5,00,000 profit — now what happens to it?”

Accounting treatment – the logic

The Profit Appropriation Account is credited with the net profit brought forward from the Profit and Loss Account. Then, all appropriations (interest on capital, partner’s salary, partner’s commission, transfer to reserve) are debited to this account. The balance left after all debits is the divisible profit, which is then credited to the partners’ capital accounts in their profit-sharing ratio.

Important

The Profit Appropriation Account is not a real account — it is a nominal account. It is closed at the end of each year by transferring its balance to the partners’ capital accounts.

The format (as per NCERT Class 12)

Below is the standard proforma. Note that the left side (Dr.) shows all appropriations, and the right side (Cr.) shows the net profit brought in.

Dr.	Profit and Loss Appropriation Account	Cr.
Particulars	Amount (Rs)	Particulars
To Interest on Capital:		By Net Profit (transferred from P&L A/c)
– Partner A	XXX
– Partner B	XXX
To Partner’s Salary (if any)	XXX
To Partner’s Commission (if any)	XXX
To General Reserve	XXX
To Profit transferred to:
– Partner A’s Capital A/c	XXX
– Partner B’s Capital A/c	XXX
Total	XXX	Total

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Profit and Loss Appropriation Account for the year ended March 31, 2019

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	40,000
Amann's Capital (2/5 × 40,000)	16,000
Babita's Capital (2/5 × 40,000 – 6,000)	14,000
Suresh's Capital (1/5 × 40,000 + 6,000)	10,000
Total	40,000	Total	40,000

Working: Suresh's guaranteed share = ₹10,000. His actual share (1/5 of ₹40,000) = ₹8,000. Deficiency = ₹2,000, borne entirely by Babita. So Babita gets ₹16,000 – ₹2,000 = ₹14,000; Suresh gets ₹8,000 + ₹2,000 = ₹10,000.

Profit and Loss Appropriation Account for the year ended March 31, 2020

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	60,000
Amann's Capital (2/5 × 60,000)	24,000
Babita's Capital (2/5 × 60,000)	24,000

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For 2019: Amann gets ₹16,000, Babita gets ₹14,000, Suresh gets ₹10,000 (guaranteed, deficiency borne by Babita). For 2020: Amann gets ₹24,000, Babita gets ₹24,000, Suresh gets ₹12,000.

Concept and Treatment

The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It shows how the net profit (or loss) of a partnership firm is appropriated — that is, distributed among the partners. It is debited with all appropriations (interest on capital, salary, commission, and the share of profit transferred to partners' capital accounts) and credited with the net profit brought down from the Profit and Loss Account plus any appropriations from partners (like interest on drawings).

The key rule: Appropriation is a charge against profit only if the partnership deed says so. In this problem, the only appropriation is the distribution of profit itself, plus a guarantee to Suresh. A guarantee is not a charge; it is a minimum profit share that must be given to the guaranteed partner. If the firm's profit is insufficient to meet the guarantee, the deficiency is borne by the partner(s) who guaranteed it — here, Babita alone.

Why Babita bears the deficiency? The problem states: "Any deficiency on that account shall be met by Babita." This means Babita's share of profit is reduced by the amount needed to make Suresh's share ₹10,000. Amann is unaffected by the guarantee.

How the guarantee works:

First, compute each partner's share of profit in the normal ratio (2:2:1).
If Suresh's share is less than ₹10,000, the deficiency (₹10,000 – Suresh's share) is deducted from Babita's share.
Amann's share remains unchanged.

Let's apply this to both years.

Solution: Profit and Loss Appropriation Account

For the year ended March 31, 2019

Working Notes:

Net Profit: ₹40,000 (given)
Normal distribution (2:2:1):
- Total parts = 2+2+1 = 5
- Amann's share = (2/5) × ₹40,000 = ₹16,000
- Babita's share = (2/5) × ₹40,000 = ₹16,000
- Suresh's share = (1/5) × ₹40,000 = ₹8,000
Guarantee check: Suresh's normal share (₹8,000) < Guaranteed minimum (₹10,000). Deficiency = ₹10,000 – ₹8,000 = ₹2,000.
Deficiency borne by Babita: Babita's share reduces by ₹2,000. So Babita gets ₹16,000 – ₹2,000 = ₹14,000.
Final shares: Amann ₹16,000, Babita ₹14,000, Suresh ₹10,000.

Profit and Loss Appropriation Account for the year ended March 31, 2019

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit (from P&L A/c)	40,000
Amann's Capital A/c	16,000
Babita's Capital A/c	14,000
Suresh's Capital A/c	10,000
Total	40,000	Total	40,000

For the year ended March 31, 2020

Working Notes:

Net Profit: ₹60,000 (given)
Normal distribution (2:2:1):
- Amann's share = (2/5) × ₹60,000 = ₹24,000
- Babita's share = (2/5) × ₹60,000 = ₹24,000
- Suresh's share = (1/5) × ₹60,000 = ₹12,000 …

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Concept and Treatment

Solution: Profit and Loss Appropriation Account

For the year ended March 31, 2019

For the year ended March 31, 2020

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