Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha' share in profit h

Numerical Questions · Q28

Q. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha' share in profit has been guaranteed by Amit and Sumit to be a minimum sum of Rs. 8,000. Profits for the year ended March 31, 2017 was Rs. 36,000. Divide profit among the partners by preparing profit and loss appropriation account.

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Concept understanding — Profit Appropriation Account

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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Samiksha’s guaranteed minimum profit of ₹8,000 is met by debiting the deficiency from Amit and Sumit in their sacrificing ratio (3:2). Final profit shares: Amit ₹16,800, Sumit ₹11,200, Samiksha ₹8,000.

Concept and Treatment

When a partner’s share of profit is guaranteed to be a minimum amount, the Profit and Loss Appropriation Account is first used to distribute the net profit in the agreed profit-sharing ratio (3:2:1). If the guaranteed partner’s share falls short of the guaranteed minimum, the deficiency is borne by the guaranteeing partners in their guarantee-sharing ratio (which, unless otherwise agreed, is the same as their profit-sharing ratio — here 3:2 between Amit and Sumit).

The key rule: the guarantee is an appropriation of profit, not a charge against profit. It does not reduce the firm’s profit; it merely reallocates the shares among partners. The deficiency is transferred from the guaranteeing partners’ capital accounts to the guaranteed partner’s capital account via the Profit and Loss Appropriation Account.

Solution

Profit and Loss Appropriation Account

for the year ended March 31, 2017

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	36,000
Amit’s Capital A/c	16,800
Sumit’s Capital A/c	11,200
Samiksha’s Capital A/c	8,000
Total	36,000	Total	36,000

Partners’ Capital Accounts (extract showing profit share)

Particulars	Amit (₹)	Sumit (₹)	Samiksha (₹)	Particulars	Amit (₹)	Sumit (₹)	Samiksha (₹)
To Deficiency (Samiksha)	1,200	800	–	By Profit & Loss App. A/c	18,000	12,000	6,000
To Balance c/d	16,800	11,200	8,000	By Deficiency (Amit & Sumit)	–	–	2,000
Total	18,000	12,000	8,000	Total	18,000	12,000	8,000

Watch out

A common mistake is to treat the guarantee as a charge and debit the Profit and Loss Account directly. This is wrong — the guarantee is an appropriation, so it appears only in the Appropriation Account and the partners’ capital accounts. …

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Concept and Treatment

Solution

Profit and Loss Appropriation Account

Partners’ Capital Accounts (extract showing profit share)

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