Q.(a) Laxmi, Rani and Priya were partners in a firm sharing profits and losses in the ratio of 5 : 7 : 8. Their fixed capitals were ₹ 8,00,000; ₹ 7,00,000 and ₹ 5,00,000 respectively. The partnership deed provided interest on capital @ 9% per annum. For the year ending 31st March, 2025, interest on capital was provided @ 12% per annum. Showing your workings clearly, pass a single adjustment entry to rectify the error.
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)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.
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 |
Part (b)Concept understanding — Guarantee of Profit
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.
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 |
Part (a)
Interest was wrongly given at 12% instead of 9% — an excess of 3% on each capital. This excess (₹60,000) was over-credited to partners as interest and it had reduced the profit that should have been distributed in 5:7:8. Both effects are set right in one entry.
Statement of Adjustment
| Partner | Excess interest wrongly credited (Dr) | Profit to be re-credited 5:7:8 (Cr) | Net |
|---|---|---|---|
| Laxmi | 24,000 | 15,000 | 9,000 Dr |
| Rani | 21,000 | 21,000 | Nil |
| Priya | 15,000 | 24,000 | 9,000 Cr |
| Total | 60,000 | 60,000 | — |
Capitals are fixed, so the adjustment is passed through Current Accounts.
| Particulars | L.F. | Dr (₹) | Cr (₹) |
|---|---|---|---|
| Laxmi's Current A/c Dr. | 9,000 |
Part (a): One entry — Laxmi's Current A/c Dr. ₹9,000 To Priya's Current A/c ₹9,000.
Part (b): In the appropriation account Suman gets the guaranteed ₹1,20,000, Sukesh ₹2,65,000 (after bearing ₹10,000), Surbhi ₹1,65,000.
Part (a)
Concept
Interest on capital is an appropriation. Charging 12% instead of 9% over-credited each partner by 3% of capital and, because that excess was debited to appropriation, it reduced the divisible profit that ought to have gone to partners in 5:7:8. A single adjustment entry both recovers the excess interest and re-credits the profit in the profit-sharing ratio.
Working Notes
Excess interest @ 3%: Laxmi 8,00,000×3% = 24,000; Rani 7,00,000×3% = 21,000; Priya 5,00,000×3% = 15,000 → total ₹60,000.
Re-credit ₹60,000 as profit in 5:7:8 (÷20): Laxmi 15,000; Rani 21,000; Priya 24,000.
| Partner | Excess interest recovered (Dr) | Profit re-credited (Cr) | Net effect |
|---|---|---|---|
| Laxmi | 24,000 | 15,000 | 9,000 Dr |
| Rani | 21,000 | 21,000 | Nil |
| Priya | 15,000 | 24,000 | 9,000 Cr |
| Total | 60,000 | 60,000 | — |
Adjustment Entry (capitals are fixed → Current Accounts)
| Particulars | L.F. | Dr (₹) | Cr (₹) |
|---|---|---|---|
| Laxmi's Current A/c Dr. | 9,000 | ||
| To Priya's Current A/c | 9,000 | ||
| (Excess interest on capital @3% rectified and profit redistributed 5:7:8) |
Showing the 12 most recent of 50 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.What is the interest on partner's capital for a partner?(a) An expense(b) Liability(c) Income(d) Loss
›Reveal solutionSolution
From a partner's viewpoint, interest on capital is income; the correct option is (c).
Interest on capital is calculated on the balance a partner keeps invested in the firm and is allowed only when the partnership deed permits it. In the firm's books it is an appropriation of profit (debited to the Profit and Loss Appropriation Account, not a business expense). But the question asks about the posit …
- CBSE 2026Set MARCH1 markMCQQ.Interest on capital is credited to the ______ Account.(a) Profit and Loss Account(b) Partner's Capital Account(c) Profit and Loss Appropriation Account(d) Revaluation account
›Reveal solutionSolution
Interest on capital is credited to the Partner's Capital Account — option (b).
In a Kerala Plus Two (DHSE) Accountancy partnership problem, interest on capital is an appropriation of profit. It rewards a partner for the money he has kept invested in the firm, so it must be given to that partner. The double entry is:
Account Debit Credit Profit and Loss Appropriation A/c ✓ Partner's Capital A/c (or Current A/c) ✓ … - CBSE 2026Set ANNUAL1 markMCQQ.Which one of the following item is related to credit side of Profit and Loss Appropriation Account? A) Interest on partners' capital B) Interest on partners' loans C) Interest on partners' drawings D) Salary paid to partners
›Reveal solutionSolution
Interest on partners' drawings is income FOR the firm, so it is credited to the Profit and Loss Appropriation Account — option (C) is correct.
The Profit and Loss Appropriation Account shows how net profit is distributed among partners:
- Debit side: interest on capital, salary/commission to partners, transfer to reserve, share of profit to partners.
- Credit side: net profit brought down from the P&L Account and interest on partners' drawings (recovered from partners). …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: The amount of interest on capital is shown in __________ side of Profit and Loss Appropriation Account. (Credit/Debit)
›Reveal solutionSolution
Interest on capital is shown on the DEBIT side of the Profit and Loss Appropriation Account.
The Profit and Loss Appropriation Account distributes the net profit. Items that give/allow amounts to partners - interest on capital, salary or commission to partners, and their share of profit - are debited, while net profit and interest on drawings are credited. Interest on capital, being an allowance …
- CBSE 2026Set ANNUAL1 markQ.Why is Profit and Loss Appropriation A/c prepared?
›Reveal solutionSolution
The P&L Appropriation A/c exists to distribute the firm's net profit among partners exactly as the partnership deed directs, item by item.
An ordinary Profit and Loss Account only determines the firm's overall net profit (or loss) for the year from its trading and other operations — it does not concern itself with how that profit is to be shared among the partners. But in a partnership, the deed often entitles individual partners to specific extra benefits before the residual profit is shared, such as:
- Interest on partners' capital
- Salary or commission to working partners
- Interest charged on partners' drawings (this reduces the amount available, since it is added back as income to the firm)
- The remaining (residual) profit shared in the agreed profit-sharing ratio
The Profit and Loss Appropriation Account is prepared, immediately after the P&L Account, specifically to carry out this distribution — it is credited with the net profit (brought down from the P&L A/c) and interest on drawings, and debited with interest on capital, partners' salary/commission, and finally the balance (residual profit) transferred to the partners' capital/current accounts in their profit-sharing ratio.
…
- CBSE 2025Set 67/5/11 markMCQQ.John and Harry were partners in a firm sharing profits and losses in the ratio of 2 : 1. On 1st April, 2023, they admitted Dinesh as a new partner for 1/4th share in the profits of the firm with a guarantee that his share in the profits shall be at least ₹ 1,00,000. The net profit of the firm for the year ended 31st March, 2024 was ₹ 2,80,000. John’s share in the profits of the firm after giving the guaranteed amount of profit to Dinesh will be : (A) ₹ 1,40,000 (B) ₹ 1,20,000 (C) ₹ 1,00,000 (D) ₹ 70,000
›Reveal solutionSolution
John's share after bearing the guarantee shortfall to Dinesh is ₹1,20,000.
Concept: Guarantee of Minimum Profit to a Partner
When an incoming partner is admitted with a guarantee of minimum profit, the firm promises that the new partner will receive at least a specified amount, regardless of what the profit-sharing ratio yields. If the new partner's share calculated by the agreed ratio falls short of the guaranteed amount, the deficiency must be borne by one or more of the existing partners.
The accounting treatment depends on who bears the guarantee. The question is silent on this point, which means we apply the default rule: the deficiency is borne by the old partners (here, John and Harry) in their old profit-sharing ratio. The new partner receives the guaranteed amount, and the remaining profit is distributed among all partners in the new ratio, but the old partners' shares are reduced to make up the shortfall.
The mechanics are straightforward:
- Calculate Dinesh's share under the new profit-sharing ratio.
- Compare it with the guaranteed amount.
- If the calculated share is less, the deficiency is borne by John and Harry in their old ratio (2:1).
- Adjust each partner's final share accordingly.
Determination of New Profit-Sharing Ratio
Dinesh is admitted for 41 share. The remaining share for John and Harry together is:
1−41=43
John and Harry continue to share this 43 in their old ratio of 2:1.
John's new share:
32×43=42=21
Harry's new share:
31×43=41
New profit-sharing ratio = John : Harry : Dinesh = 21:41:41 = 2 : 1 : 1.
Calculation of Profit Distribution
Working Note 1: Dinesh's share as per new ratio
Net profit for the year = ₹2,80,000
Dinesh's share = 41×2,80,000=₹70,000
Working Note 2: Guarantee shortfall
Guaranteed amount to Dinesh = ₹1,00,000
Dinesh's share as per ratio = ₹70,000
Deficiency = ₹1,00,000 – ₹70,000 = ₹30,000
This deficiency of ₹30,000 must be borne by John and Harry in their old ratio of 2:1.
Working Note 3: Deficiency borne by old partners
John's share of deficiency = 32×30,000=₹20,000
Harry's share of deficiency = 31×30,000=₹10,000
Working Note 4: Final distribution of profit
| Partner | Share as per new ratio (2:1:1) | Adjustment for guarantee | Final share | …
- CBSE 2025Set ANNUAL1 markMCQQ.Profit & Loss Appropriation Account is a (A) Nominal A/c (B) Personal A/c (C) Real A/c (D) Capital A/c.
›Reveal solutionSolution
The Profit & Loss Appropriation Account is a Nominal Account — option (A).
Accounts are classified as Personal (relating to persons/firms), Real (relating to assets) or Nominal (relating to incomes, expenses, gains and losses). The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account prepared by a partnership firm to show how the year's net profit is appropriated — interest on capital, partners' salary/commission, transfer to reserve and …
- CBSE 2025Set ANNUAL1 markMCQQ.A partnership firm earned net profit of Rs. 4,20,000 and partner X is entitled to get commission @ 5% on net profit (after charging his commission), then the amount of commission to X is (A) Rs. 20,500 (B) Rs. 21,000 (C) Rs. 20,000 (D) None of these.
›Reveal solutionSolution
X's commission is Rs. 20,000 — option (C).
When commission is given at a rate on net profit after charging such commission, the commission base is the profit left after the commission itself is deducted. The formula is:
Commission = Net Profit x Rate / (100 + Rate)
Substituting the figures: …
- CBSE 2024Set 67/1/11 markMCQQ.Abhay, Boris and Chetan were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Boris was guaranteed a profit of ₹95,000. Any deficiency on account of this was to be borne by Abhay and Chetan equally. The firm earned a profit of ₹2,00,000 for the year ended 31st March, 2023. The amount given by Abhay to Boris as guaranteed amount will be : (A) ₹17,500 (B) ₹35,000 (C) ₹25,000 (D) ₹10,000
›Reveal solutionSolution
Abhay contributes ₹17,500 to Boris to meet the guarantee shortfall; the answer is (A) ₹17,500.
Concept: Guarantee of Minimum Profit to a Partner
When a partner is guaranteed a minimum profit, the firm first distributes profit in the normal profit-sharing ratio. If the guaranteed partner's share falls short of the guarantee, the deficiency must be made good. The question then becomes: who bears this deficiency?
Here, Boris is guaranteed ₹95,000. The deficiency (if any) is to be borne by Abhay and Chetan equally — meaning they share the burden 1:1, not in their original profit ratio. This is a specific arrangement among the partners.
The accounting treatment is straightforward:
- Distribute the total profit (₹2,00,000) in the normal ratio 5:3:2.
- Compare Boris's share with his guarantee.
- If his share is less, calculate the deficiency.
- Abhay and Chetan each contribute half the deficiency from their own shares to Boris.
The net effect is a transfer within the appropriation: Abhay's and Chetan's capital/current accounts are debited (reduced), and Boris's is credited (increased) by the deficiency amount, split equally between the two guarantors.
Solution
Working Note 1: Distribution of Profit in Normal Ratio (5:3:2)
Total profit = ₹2,00,000
Profit-sharing ratio = 5:3:2 (sum = 10)
- Abhay's share = 105×2,00,000=₹1,00,000
- Boris's share = 103×2,00,000=₹60,000
- Chetan's share = 102×2,00,000=₹40,000
Working Note 2: Deficiency in Boris's Share
Boris is guaranteed ₹95,000, but his normal share is only ₹60,000.
Deficiency = ₹95,000 − ₹60,000 = ₹35,000
This ₹35,000 shortfall must be made good by Abhay and Chetan equally.
Working Note 3: Contribution by Abhay and Chetan
Since the deficiency is to be borne equally:
- Abhay's contribution = 235,000=₹17,500
- Chetan's contribution = 235,000=₹17,500
Working Note 4: Final Distribution of Profit
Partner Normal Share (₹) Adjustment (₹) Final Share (₹) Abhay 1,00,000 −17,500 82,500 Boris 60,000 +35,000 95,000 Chetan 40,000 −17,500 22,500 Total 2,00,000 0 2,00,000 The adjustment is a pure transfer: Abhay and Chetan each give up ₹17,500 of their profit share, which is added to Boris's share to bring it up to the guaranteed ₹95,000. …
- CBSE 2024Set ANNUAL1 markMCQQ.Interest on Capital of a partnership firm is(a) an expense.(b) an income.(c) an asset.(d) None of these.
›Reveal solutionSolution
Interest on capital is an appropriation of profit, not an expense/income/asset — so option (d) None of these is correct.
Interest on partners' capital is allowed only when the partnership deed provides for it, and it is given out of profits. It is therefore debited to the Profit & Loss Appropriation Account (a distribution of profit among partners), not to the Profit & Loss Account as a business expense.
- It is not 'an expense' — a true charge against profit (like rent or interest on loan) is debited to the P&L Account; interest on capital is not. …
- CBSE 2024Set ANNUAL1 markMCQQ.Which one of the following items is not entered in the Profit & Loss Appropriation Account?(a) Interest on Partners' Capital.(b) Interest on Partners' Drawings.(c) Rent paid to partners.(d) Salary paid to partners.
›Reveal solutionSolution
Rent paid to a partner is a charge against profit shown in the P&L Account, not in the Appropriation Account — option (c).
The Profit & Loss Appropriation Account shows how the net profit is divided/appropriated among the partners. Items entered there include:
- Interest on partners' capital (appropriation),
- Interest on partners' drawings (credited, an appropriation),
- Salary/commission paid to partners (appropriation). …
- CBSE 2024Set ANNUAL1 markMCQQ.A, R and B are partners in a firm sharing profits and losses in the ratio of 6 : 4 : 1. A guaranteed minimum profit of ₹ 16,000 to B. The net profit of the firm for the year ended on 31st March, 2023 was ₹ 1,32,000. R's share of profit of the firm will be(a) ₹ 72,000.(b) ₹ 68,000.(c) ₹ 48,000.(d) ₹ 16,000.
›Reveal solutionSolution
R's share of profit is ₹48,000 — option (c) — because the guarantee to B is borne by A, leaving R's normal share unchanged.
Profit-sharing ratio A : R : B = 6 : 4 : 1 (total 11). Net profit = ₹1,32,000.
Partner Normal share Amount (₹) A 6/11 72,000 R 4/11 48,000 B 1/11 12,000 …
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