X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3: 2: 1, respectively. Z's share in

Numerical Questions · Q32

Q. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3: 2: 1, respectively. Z's share in the profit is guaranteed by X and Y to be a minimum of Rs. 8,000. The net profit for the year ended March 31, 2020 was Rs. 30,000. Prepare Profit and Loss Appropriation Account.

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Concept understanding — Guarantee of Profit

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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Z’s share is guaranteed at ₹8,000 minimum. Net profit ₹30,000 is distributed in the ratio 3:2:1, but since Z’s share (₹5,000) falls short, the deficiency of ₹3,000 is borne by X and Y in their profit-sharing ratio (3:2). Final profits: X ₹13,200, Y ₹8,800, Z ₹8,000.

Concept First: Why This Treatment?

A guarantee of profit means one partner (here, Z) is assured a minimum amount from the firm’s profits, regardless of what the normal sharing ratio would give. If the actual share under the ratio is less than the guaranteed amount, the deficiency is made up by the guaranteeing partners (X and Y) in their agreed ratio — usually their own profit-sharing ratio, unless stated otherwise.

The key rule: The guarantee is an appropriation of profit, not a charge against profit. It does not reduce the net profit; it only redistributes it among partners. So the Profit and Loss Appropriation Account starts with the net profit of ₹30,000, and we first compute each partner’s share under the 3:2:1 ratio, then adjust for the deficiency.

Watch out

Common Pitfall

Do not treat the guaranteed amount as a fixed payment before dividing the rest. The correct method: divide the whole profit in the ratio, then adjust the deficiency. If you first set aside ₹8,000 for Z and divide the remaining ₹22,000 in 3:2, you get X ₹13,200, Y ₹8,800, Z ₹8,000 — which coincidentally matches here, but that shortcut fails when the guarantee is larger than the ratio share. Always follow the systematic method.

Step-by-Step Solution

Step 1: Compute each partner’s share under the profit-sharing ratio

Net profit = ₹30,000

Ratio = 3 : 2 : 1 (total 6 parts)

X’s share = 3/6 × ₹30,000 = ₹15,000
Y’s share = 2/6 × ₹30,000 = ₹10,000
Z’s share = 1/6 × ₹30,000 = ₹5,000

Step 2: Identify the deficiency in Z’s share

Guaranteed minimum for Z = ₹8,000

Actual share = ₹5,000

Deficiency = ₹8,000 – ₹5,000 = ₹3,000

Step 3: Allocate the deficiency between X and Y

The deficiency is borne by X and Y in their profit-sharing ratio, which is 3:2 (since they are the guaranteeing partners and no other ratio is specified).

X’s contribution to deficiency = 3/5 × ₹3,000 = ₹1,800
Y’s contribution to deficiency = 2/5 × ₹3,000 = ₹1,200

Step 4: Compute final profit shares

X’s final share = ₹15,000 – ₹1,800 = ₹13,200
Y’s final share = ₹10,000 – ₹1,200 = ₹8,800
Z’s final share = ₹5,000 + ₹3,000 = ₹8,000

Total = ₹13,200 + ₹8,800 + ₹8,000 = ₹30,000 ✓

Tip

Shortcut Check

The deficiency of ₹3,000 is exactly the difference between Z’s guaranteed amount and his ratio share. X and Y reduce their shares by 3:2, so X's final share becomes ₹13,200 and Y's becomes ₹8,800, while Z receives the guaranteed ₹8,000.

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit (as per P&L A/c)	30,000
X’s Capital A/c	13,200
Y’s Capital A/c	8,800
Z’s Capital A/c	8,000

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Q.X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3: 2: 1, respectively. Z's share in the profit is guaranteed by X and Y to be a minimum of Rs. 8,000. The net profit for the year ended March 31, 2020 was Rs. 30,000. Prepare Profit and Loss Appropriation Account.

Concept First: Why This Treatment?

Step-by-Step Solution

Step 1: Compute each partner’s share under the profit-sharing ratio

Step 2: Identify the deficiency in Z’s share

Step 3: Allocate the deficiency between X and Y

Step 4: Compute final profit shares

Profit and Loss Appropriation Account

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