Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss acc

Numerical Questions · Q10

Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2020 shows a net profit of Rs. 1,50,050. Prepare the Profit and Loss Appropriation Account and partners current account by taking into consideration the following information:

Particulars	Simmi (₹)	Sonu (₹)
Capital on April 1, 2019	30,000	60,000
Current account balance on April 1, 2019 (Cr.)	30,000	15,000
Drawings during the year	20,000	15,000
Salary	12,000	9,000

Interest on capital was allowed @ 5% p.a. Interest on drawing was to be charged @ 6% p.a. at an average of six months.

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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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We will prepare the Profit and Loss Appropriation Account and the Partners’ Current Accounts step by step. The profit-sharing ratio is 3:1 (Simmi : Sonu).

Step 1 – Calculate Interest on Capital

Interest is allowed at 5% p.a. on the opening capitals (April 1, 2019).

Simmi: 5% of ₹30,000 = ₹1,500
Sonu: 5% of ₹60,000 = ₹3,000

Step 2 – Calculate Interest on Drawings

Drawings are charged at 6% p.a. for an average period of six months.

Interest = Drawings × 6% × 6/12 = Drawings × 3%

Simmi: 3% of ₹20,000 = ₹600
Sonu: 3% of ₹15,000 = ₹450

Step 3 – Partners’ Salaries

Simmi: ₹12,000
Sonu: ₹9,000

Step 4 – Prepare Profit and Loss Appropriation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Net Profit (as per P&L)	1,50,050
Simmi	1,500	By Interest on Drawings:
Sonu	3,000	Simmi	600
To Partners’ Salaries:		Sonu	450
Simmi	12,000
Sonu	9,000
To Profit transferred to:
Simmi’s Current A/c (3/4)	94,200
Sonu’s Current A/c (1/4)	31,400
Total	1,51,100	Total	1,51,100

Note

The total credit side (₹1,50,050 + ₹600 + ₹450 = ₹1,51,100) matches the debit side. The profit share is computed on the remaining profit after all appropriations: ₹1,51,100 – (₹1,500+₹3,000+₹12,000+₹9,000) = ₹1,25,600. Simmi gets 3/4 = ₹94,200; Sonu gets 1/4 = ₹31,400.

Step 5 – Prepare Partners’ Current Accounts …

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Simmi and Sonu share profits 3:1. After charging interest on capital (5% p.a.), interest on drawings (6% p.a. for 6 months), and partners' salaries, the net profit of ₹1,50,050 is appropriated: Simmi gets ₹94,200 and Sonu gets ₹31,400.

Concept and Accounting 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 distributed among the partners. The key principle: all appropriations are debited to this account (they reduce the profit available for division), and the final divisible profit is credited to the partners' capital/current accounts in their profit-sharing ratio.

Why this order? Interest on capital is a reward for the funds partners have contributed; it is calculated on the opening capital balances. Interest on drawings is a charge against the partner who withdrew money early — it increases the profit pool. Partners' salaries are a contractual entitlement, treated as an appropriation (not a charge) unless the partnership deed says otherwise. After these items, the remaining profit is split in the agreed ratio.

Which accounts are debited/credited?

Profit and Loss Appropriation Account is credited with the net profit brought from the P&L Account.
It is debited with: Interest on Capital (to partners), Partners' Salaries, and the share of profit transferred to partners.
It is credited with: Interest on Drawings (from partners).
The partners' Current Accounts (or Capital Accounts if fixed capital method is used) are credited with interest on capital, salaries, and profit share; they are debited with interest on drawings and drawings themselves.

Since the question gives opening current account balances, we use the fixed capital method — capital accounts remain constant, and all adjustments pass through current accounts.

Solution: Profit and Loss Appropriation Account

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

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Profit and Loss A/c (Net Profit)	1,50,050
Simmi (WN 1)	1,500	By Interest on Drawings (WN 2):
Sonu (WN 1)	3,000	Simmi	600
To Partners' Salaries:		Sonu	450
Simmi	12,000
Sonu	9,000
To Profit transferred to:
Simmi's Current A/c (3/4)	94,200
Sonu's Current A/c (1/4)	31,400
Total	1,51,100	Total	1,51,100

Partners' Current Accounts

Dr. Simmi's Current Account | Cr.

Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	20,000	By Balance b/d	30,000
To Interest on Drawings A/c	600	By Interest on Capital A/c	1,500
To Balance c/d	1,17,100	By Partners' Salary A/c	12,000
		By Profit & Loss Appropriation A/c	94,200
Total	1,37,700	Total	1,37,700

Dr. Sonu's Current Account | Cr.

Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	15,000	By Balance b/d	15,000
To Interest on Drawings A/c	450	By Interest on Capital A/c	3,000
To Balance c/d	42,950	By Partners' Salary A/c	9,000
		By Profit & Loss Appropriation A/c	31,400
Total	58,400	Total	58,400

Working Notes

WN 1: Interest on Capital @ 5% p.a. on opening capital

Simmi: 5% of ₹30,000 = ₹1,500

Sonu: 5% of ₹60,000 = ₹3,000

WN 2: Interest on Drawings @ 6% p.a. for average 6 months

Formula: Drawings × Rate × (Average Period / 12)

Simmi: ₹20,000 × 6% × 6/12 = ₹20,000 × 0.06 × 0.5 = ₹600

Sonu: ₹15,000 × 6% × 6/12 = ₹15,000 × 0.06 × 0.5 = ₹450 …

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Concept and Accounting Treatment

Solution: Profit and Loss Appropriation Account

Partners' Current Accounts

Working Notes

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