Q.Amit, Babu and Charu set up a partnership firm on April 1, 2019. They contributed ₹50,000, ₹40,000 and ₹30,000, respectively as their capitals and agreed to share profits and losses in the ratio of 3 : 2 : 1. Amit is to be paid a salary of ₹1,000 per month and Babu, a Commission of ₹5,000. It is also provided that interest to be allowed on capital at 6% p.a. The drawings for the year were Amit ₹6,000, Babu ₹4,000 and Charu ₹2,000. Interest on drawings of ₹270 was charged on Amit's drawings, ₹180 on Babu's drawings and ₹90, on Charu's drawings. The net profit as per Profit and Loss Account for the year ending March 31, 2020 was ₹35,660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.

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 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.

Key formula (plain text)

Interest on Capital = Capital × Rate of Interest × (Period / 12 months)

For example, if Partner A has capital of Rs 2,00,000 and the agreed rate is 10% per annum for a full year, interest on capital = 2,00,000 × 10/100 × 12/12 = Rs 20,000.

A common mistake to avoid

In a nutshell

• Purpose: To show how net profit is allocated among partners and reserves.
• Nature: Nominal account, closed at year-end.
• Debit side: All appropriations (interest, salary, commission, reserve, profit share).
• Credit side: Net profit from P&L Account.
• Final balance: Transferred to partners’ capital accounts in profit-sharing ratio.

Once you see it as a simple “distribution sheet” for the profit, the whole concept clicks. The format is just a way to organise those distributions neatly.