Q.A and B are partners sharing profits and losses equally. Their capitals as on 1st April 2023 were A ₹2,00,000 and B ₹1,50,000. The partnership deed provides:

Before splitting the profit itself, the firm must first honour the fixed promises in the deed — interest on capital, A's salary, and the reserve transfer — and only what remains after that is actually divided between A and B.

Interest on capital: A ₹10,000 + B ₹7,500 = ₹17,500. Salary to A = ₹2,000 × 12 = ₹24,000. Reserve = 10% of ₹1,20,000 = ₹12,000. Divisible profit = ₹1,20,000 − ₹17,500 − ₹24,000 − ₹12,000 = ₹66,500, shared equally.

Step 1: Interest on Capital @5% p.a.

A = ₹2,00,000 × 5% = ₹10,000

B = ₹1,50,000 × 5% = ₹7,500

Total = ₹17,500

Step 2: Salary to A

₹2,000 × 12 months = ₹24,000

Step 3: Transfer to General Reserve

10% of ₹1,20,000 = ₹12,000

Step 4: Divisible Profit

₹1,20,000 − ₹17,500 − ₹24,000 − ₹12,000 = ₹66,500, shared equally between A and B: ₹33,250 each.

Profit and Loss Appropriation Account for the year ended 31st March 2024

Debit side:

Credit side:

As a check, total everything given away by the Appropriation Account and confirm it equals the net profit brought down: ₹17,500 (interest) + ₹24,000 (salary) + ₹12,000 (reserve) + ₹66,500 (profit share) = ₹1,20,000, which exactly matches the net profit b/d of ₹1,20,000 — confirming the account balances correctly.

Students sometimes deduct interest on capital and salary from net profit but forget to also deduct the reserve transfer before dividing the balance, or wrongly divide the full ₹1,20,000 equally before deducting any appropriations at all. Also watch for crediting A's salary directly to his Capital Account without first routing it through the Appropriation Account — the Appropriation Account must always show the full working, not just the final capital account entries.