Q.Reena and Raman are partners with capitals of ₹3,00,000 and ₹1,00,000 respectively. The profit for the year ended March 31, 2020 was ₹1,80,000, before paying rent for her personal building to be used as godown for firm to Reena payable at ₹5,000 per month. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of ₹30,000 p.a. The drawings of partners were ₹30,000 and ₹20,000. The interest on drawings to be charged to Reena was ₹1,000 and to Raman, ₹500. Assuming that Reena and Raman are equal partners, state their share of profit after necessary appropriations. Note: Payment of Rent to Reena is an expense for the business. Hence, it is a charge against profits.

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.