Ram, Mohan and Sohan are partners with capitals of Rs. 5,00,000, Rs. 2,50,000 and 2,00,000 respectively. After

Numerical Questions · Q35

Q. Ram, Mohan and Sohan are partners with capitals of Rs. 5,00,000, Rs. 2,50,000 and 2,00,000 respectively. After providing interest on capital @ 10% p.a. the profits are divisible as follows: Ram 1/2, Mohan 1/3 and Sohan 1/6. Ram and Mohan have guaranteed that Sohan's share in the profit shall not be less than Rs. 25,000, in any year. The net profit for the year ended March 31, 2017 is Rs. 2,00,000, before charging interest on capital. You are required to show distribution of profit by preparing P & L 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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After charging interest on capital, the divisible profit is ₹1,05,000. Ram and Mohan's guarantee to Sohan (minimum ₹25,000) creates a deficiency of ₹7,500, which Ram and Mohan bear in their profit-sharing ratio (1/2 : 1/3, i.e. 3:2). Final profit shares: Ram ₹48,000, Mohan ₹32,000, Sohan ₹25,000.

Concept First: Guarantee of Profit

When a partner is guaranteed a minimum share of profit, and the actual share falls short, the deficiency is borne by the guaranteeing partners in their agreed ratio (here, Ram and Mohan in their profit-sharing ratio of 1/2 : 1/3, i.e. 3:2). This is not a charge against profit; it is an appropriation of profit. The guarantee is fulfilled by transferring the deficiency from the guarantors' shares to the guaranteed partner's share. The P&L Appropriation Account shows the final distribution after this adjustment.

Step-by-Step Solution

Step 1: Calculate Interest on Capital

Interest on capital is a charge against profit (unless the partnership deed says otherwise; here, it is provided before profit distribution).

Ram: 10% of ₹5,00,000 = ₹50,000
Mohan: 10% of ₹2,50,000 = ₹25,000
Sohan: 10% of ₹2,00,000 = ₹20,000

Total interest on capital = ₹95,000

Step 2: Determine Divisible Profit

Net profit before interest = ₹2,00,000

Less: Interest on capital (charge) = ₹95,000

Divisible profit = ₹1,05,000

Step 3: Distribute Divisible Profit in the Profit-Sharing Ratio

The profit-sharing ratio is given as Ram 1/2, Mohan 1/3, Sohan 1/6. (Check: 1/2 + 1/3 + 1/6 = 3/6 + 2/6 + 1/6 = 6/6 = 1)

Ram's share: 1/2 of ₹1,05,000 = ₹52,500
Mohan's share: 1/3 of ₹1,05,000 = ₹35,000
Sohan's share: 1/6 of ₹1,05,000 = ₹17,500

Step 4: Apply the Guarantee

Sohan's guaranteed minimum = ₹25,000

Sohan's actual share = ₹17,500

Deficiency = ₹25,000 - ₹17,500 = ₹7,500

This deficiency is borne by Ram and Mohan in their profit-sharing ratio (1/2 : 1/3). Convert to a common denominator: 3/6 : 2/6, i.e. 3:2.

Ram bears: 3/5 of ₹7,500 = ₹4,500
Mohan bears: 2/5 of ₹7,500 = ₹3,000

Step 5: Final Profit Shares

Ram: ₹52,500 - ₹4,500 = ₹48,000
Mohan: ₹35,000 - ₹3,000 = ₹32,000
Sohan: ₹17,500 + ₹7,500 = ₹25,000

These match the official answer key.

P & L Appropriation Account

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Concept First: Guarantee of Profit

Step-by-Step Solution

Step 1: Calculate Interest on Capital

Step 2: Determine Divisible Profit

Step 3: Distribute Divisible Profit in the Profit-Sharing Ratio

Step 4: Apply the Guarantee

Step 5: Final Profit Shares

P & L Appropriation Account

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