Q.Ram, Raj and George are partners sharing profits in the ratio 5: 3: 2. According to the partnership agreement George is to get a minimum amount of Rs. 10,000 as his share of profits every year. The net profit for the year 2013 amounted to Rs. 40,000. Prepare the Profit and Loss Appropriation Account.
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Start your 14-day free trial to unlock the full solution →George’s guaranteed minimum profit of ₹10,000 is met by the firm; the remaining ₹30,000 is distributed among Ram, Raj and George in their profit-sharing ratio 5:3:2, resulting in Ram ₹18,750, Raj ₹11,250 and George ₹10,000.
Concept and Accounting Treatment
The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It shows how the net profit (or net loss) of the partnership is appropriated — that is, distributed among the partners. Unlike a company, a partnership does not have retained earnings; every year’s profit is fully allocated to the partners’ capital accounts.
The key rule: Appropriation items are debited to the Profit and Loss Appropriation Account (because they reduce the profit available for distribution) and credited to the respective partners’ capital accounts (because they increase the partners’ claims). Common appropriations include interest on capital, partners’ salaries, commissions, and the final share of profit.
In this problem, the only appropriation is the share of profit itself. George has a guaranteed minimum profit of ₹10,000. A guarantee means that if George’s share of profit (computed normally) falls short of ₹10,000, the deficiency must be borne by the other partners in their profit-sharing ratio (or as agreed). Here, the normal share of profit for George is:
Normal share = ₹40,000 × (2/10) = ₹8,000
Since ₹8,000 < ₹10,000, the deficiency of ₹2,000 must be contributed by Ram and Raj in their ratio 5:3. This is the only adjustment needed — no interest, salary, or commission is mentioned.
A common mistake is to first distribute the entire ₹40,000 in the ratio 5:3:2 and then adjust George’s deficiency. That is correct, but you must ensure the total profit distributed equals ₹40,000. If you simply give George ₹10,000 and split the remaining ₹30,000 in 5:3, you get Ram ₹18,750 and Raj ₹11,250 — which is exactly what the NCERT answer shows. The deficiency adjustment is already embedded in that approach.
Solution: Profit and Loss Appropriation Account
Profit and Loss Appropriation Account for the year ended 31st March 2013
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Profit transferred to: | By Net Profit (as per P&L A/c) | 40,000 | |
| Ram’s Capital A/c | 18,750 | ||
| Raj’s Capital A/c | 11,250 | ||
| George’s Capital A/c | 10,000 | ||
| Total | 40,000 | Total | 40,000 |
Working Notes
Working Note 1: Normal share of profit for each partner
Total profit = ₹40,000
Profit-sharing ratio = 5 : 3 : 2 (total 10 parts)
- Ram’s normal share = ₹40,000 × 5/10 = ₹20,000
- Raj’s normal share = ₹40,000 × 3/10 = ₹12,000 …
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