Q.P, Q and R are partners sharing profits and losses equally, with capitals of ₹1,00,000 each as on 1st April 2023. The partnership deed provides for interest on capital @10% p.a. and a salary of ₹20,000 p.a. to P. The net profit for the year ended 31st March 2024, before any appropriations, was only ₹25,000. Show how this profit will be distributed among the partners, given that the deed is silent on what should happen if profit is insufficient to meet the appropriations in full.

When the promised interest and salary together add up to more than the whole of the year's profit, there is nothing left to divide in the ordinary profit-sharing ratio — the available profit has to be scaled down and shared in proportion to what each partner was promised.

P's appropriation = interest ₹10,000 + salary ₹20,000 = ₹30,000; Q's and R's appropriation = interest ₹10,000 each. Ratio 30,000:10,000:10,000 = 3:1:1.

Step 1: Compute the full appropriations each partner is entitled to

Interest on capital @10% p.a.: P, Q and R each get ₹1,00,000 × 10% = ₹10,000

Salary to P: ₹20,000

P's total appropriation = ₹10,000 + ₹20,000 = ₹30,000

Q's total appropriation = ₹10,000

R's total appropriation = ₹10,000

Total appropriations required = ₹50,000

Step 2: Compare with available net profit

Available net profit = ₹25,000, which is less than the ₹50,000 required. Since the deed does not specify what happens in this situation, the accepted practice is to distribute the available profit among the partners in the ratio of their respective appropriations, rather than paying any appropriation in full.

Step 3: Ratio of appropriations

P : Q : R = 30,000 : 10,000 : 10,000 = 3 : 1 : 1 (total 5 parts)

Step 4: Distribute ₹25,000 in this ratio

P = ₹25,000 × 3/5 = ₹15,000

Q = ₹25,000 × 1/5 = ₹5,000

R = ₹25,000 × 1/5 = ₹5,000

Total = ₹25,000

Statement of Distribution

An alternative, equivalent way to see this is to scale down each partner's own appropriation by the same common factor: available profit ÷ total required = 25,000/50,000 = 1/2. Applying this half-factor directly to each partner's own appropriation gives the same result: P = 30,000 × 1/2 = 15,000; Q = 10,000 × 1/2 = 5,000; R = 10,000 × 1/2 = 5,000.

A very common mistake is to pay interest on capital and salary in full regardless of the shortfall, and then show a negative divisible profit shared in the ordinary equal ratio — this is wrong, because a partner cannot be paid more than what the firm has actually earned. The correct approach always scales every appropriation down proportionately when the total appropriations exceed the available profit.