Arun, Boby and Chintu are partners in a firm sharing profit in the ratio of 2:2:1. According to the terms of t

Numerical Questions · Q33

Q. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio of 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of Rs. 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the Profit and loss Appropriation Account showing distribution of profits among the partners in case the profits for year 2015 are:

(i) Rs. 2,50,000;

(ii) 3,60,000.

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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.

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 2015

Case (i): Profit ₹2,50,000

Profit and Loss Appropriation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	2,50,000
Arun's Capital A/c	90,000
Boby's Capital A/c	1,00,000
Chintu's Capital A/c	60,000
Total	2,50,000	Total	2,50,000

Working:

Profit share without guarantee: Arun ₹1,00,000 (2/5), Boby ₹1,00,000 (2/5), Chintu ₹50,000 (1/5)
Chintu gets minimum ₹60,000, so deficiency = ₹10,000
Arun bears the deficiency: Arun's share reduces by ₹10,000 → ₹90,000
Boby's share remains ₹1,00,000, Chintu gets ₹60,000

Case (ii): Profit ₹3,60,000

Profit and Loss Appropriation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	3,60,000
Arun's Capital A/c	1,44,000
Boby's Capital A/c	1,44,000
Chintu's Capital A/c	72,000

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Chintu is guaranteed a minimum profit of ₹60,000; any shortfall is borne entirely by Arun. For (i) profit ₹2,50,000, final shares: Arun ₹90,000, Boby ₹1,00,000, Chintu ₹60,000. For (ii) profit ₹3,60,000, final shares: Arun ₹1,44,000, Boby ₹1,44,000, Chintu ₹72,000.

Concept First: Guarantee of Profit

A guarantee of profit is a promise by one or more partners (the guarantors) that a specific partner (the beneficiary) will receive a minimum amount of profit, regardless of the firm's actual profit. If the beneficiary's share of profit, calculated normally, falls short of the guaranteed amount, the deficiency is transferred from the guarantor(s) to the beneficiary.

Accounting Treatment:

First, calculate each partner's share of profit in the normal profit-sharing ratio (2:2:1).
Compare the beneficiary's (Chintu's) share with the guaranteed minimum (₹60,000).
If Chintu's share is less than ₹60,000, the deficiency is calculated.
This deficiency is deducted from the guarantor's (Arun's) share and added to Chintu's share. Boby is unaffected by the guarantee.
The Profit and Loss Appropriation Account shows the net profit distributed, and the Partners' Capital/Current Accounts reflect the final adjusted shares.

Watch out

Common Mistake

Do not treat the guarantee as a charge against profit (like interest on loan). It is an appropriation of profit, done after the net profit is known. Also, remember the deficiency is borne only by Arun, not by both Arun and Boby in their profit-sharing ratio.

Case (i): Profit = ₹2,50,000

Profit and Loss Appropriation Account

for the year ended 31st March, 2015

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	2,50,000
Arun's Capital A/c	90,000
Boby's Capital A/c	1,00,000
Chintu's Capital A/c	60,000
Total	2,50,000	Total	2,50,000

Working Notes

1. Calculation of Normal Profit Shares (2:2:1)

Total Profit = ₹2,50,000

Arun's share = 2/5 × 2,50,000 = ₹1,00,000

Boby's share = 2/5 × 2,50,000 = ₹1,00,000

Chintu's share = 1/5 × 2,50,000 = ₹50,000

2. Calculation of Deficiency

Chintu's guaranteed minimum = ₹60,000

Chintu's normal share = ₹50,000

Deficiency = 60,000 - 50,000 = ₹10,000

3. Adjustment of Deficiency

This deficiency of ₹10,000 is borne entirely by Arun.

Arun's final share = 1,00,000 - 10,000 = ₹90,000

Chintu's final share = 50,000 + 10,000 = ₹60,000

Boby's share remains unchanged = ₹1,00,000

Tip

Shortcut

When only one partner bears the deficiency, you can directly compute: Arun's final share = (2/5 × Profit) - Deficiency; Chintu's final share = Guaranteed amount; Boby's share = (2/5 × Profit).

Case (ii): Profit = ₹3,60,000

Profit and Loss Appropriation Account

for the year ended 31st March, 2015

| :--- | ---: | :--- | ---: | …

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Concept First: Guarantee of Profit

Case (i): Profit = ₹2,50,000

Profit and Loss Appropriation Account

Working Notes

Case (ii): Profit = ₹3,60,000

Profit and Loss Appropriation Account

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