Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3: 2: 1, subject to the followi

Numerical Questions · Q36

Q. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3: 2: 1, subject to the following:

(i) Sona's share in the profits, guaranteed to be not less than Rs. 15,000 in any year.

(ii) Babita gave guarantee to the effect that gross fee earned by her for the firm shall be equal to her aver age gross fee of the proceeding five years, when she was carrying on profession alone (which is Rs. 25,000). The net profit for the year ended March 31, 2017 is Rs. 75,000. The gross fee earned by Babita for the firm was Rs. 16,000. You are required to 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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The net profit of ₹75,000 is appropriated after adjusting Babita’s deficiency in gross fee (₹9,000) and Sona’s guaranteed minimum profit (₹15,000). Final profit shares: Amit ₹41,400, Babita ₹27,600, Sona ₹15,000.

Concept and Accounting Treatment

The question involves two guarantees in a partnership:

Guarantee of minimum profit to a partner – Sona is guaranteed at least ₹15,000. If her share of profit (based on the 3:2:1 ratio) falls short, the deficiency is borne by the other partners in their profit-sharing ratio (unless otherwise agreed). Here, Amit and Babita share the deficiency in their ratio of 3:2.
Guarantee of minimum gross fee by a partner – Babita guaranteed that her gross fee for the firm would be at least ₹25,000 (her average of the last five years). The actual fee earned was only ₹16,000, so there is a shortfall of ₹9,000. This shortfall is treated as a charge against profit – it reduces the net profit available for appropriation. Babita must bring in ₹9,000 to the firm (credited to the Profit and Loss Appropriation Account), effectively increasing the distributable profit.

Key rule: The guarantee of fee is a personal guarantee by Babita – it is not a sharing of profit but an adjustment to the profit itself. The deficiency in fee is added to the net profit before appropriation. Then, the guaranteed minimum profit to Sona is applied after the profit is computed.

Watch out

Common mistake

Do not treat Babita’s fee guarantee as an appropriation (like salary or commission). It is a charge – it increases the profit because Babita must compensate the firm for the shortfall. The entry is: Debit Babita’s Capital Account, Credit Profit and Loss Appropriation Account (or directly to P&L). Some textbooks show it as a credit to the Profit and Loss Account itself, but here we follow the NCERT approach: it is adjusted in the Appropriation Account.

Solution: Profit and Loss Appropriation Account

For the year ended March 31, 2017

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to Capital Accounts:		By Net Profit (as given)	75,000
Amit (3/6)	41,400	By Babita’s Capital A/c (deficiency in gross fee)	9,000
Babita (2/6)	27,600
Sona (1/6)	15,000
Total	84,000	Total	84,000

Note

The total credit side is ₹84,000 (₹75,000 + ₹9,000). This is the amount to be appropriated among partners.

Working Notes

Working Note 1: Adjustment for Babita’s gross fee guarantee

Guaranteed minimum gross fee: ₹25,000
Actual gross fee earned: ₹16,000
Shortfall: ₹25,000 – ₹16,000 = ₹9,000

This ₹9,000 is brought in by Babita (debited to her Capital Account) and credited to the Profit and Loss Appropriation Account. It increases the distributable profit.

Working Note 2: Calculation of profit shares before Sona’s guarantee

Total profit available for appropriation: ₹75,000 (net profit) + ₹9,000 (fee deficiency) = ₹84,000
Profit-sharing ratio: Amit : Babita : Sona = 3 : 2 : 1
Amit’s share: 3/6 × ₹84,000 = ₹42,000
Babita’s share: 2/6 × ₹84,000 = ₹28,000
Sona’s share: 1/6 × ₹84,000 = ₹14,000

Working Note 3: Sona’s guarantee deficiency

Sona’s guaranteed minimum: ₹15,000
Sona’s share as per ratio: ₹14,000
Deficiency: ₹15,000 – ₹14,000 = ₹1,000

This deficiency is borne by Amit and Babita in their profit-sharing ratio (3:2).

Amit’s share of deficiency: 3/5 × ₹1,000 = ₹600
Babita’s share of deficiency: 2/5 × ₹1,000 = ₹400

Working Note 4: Final profit shares after guarantee adjustment

Amit: ₹42,000 – ₹600 = ₹41,400
Babita: ₹28,000 – ₹400 = ₹27,600
Sona: ₹14,000 + ₹1,000 = ₹15,000

These figures match the official answer key.

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Q.Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3: 2: 1, subject to the following:

Concept and Accounting Treatment

Solution: Profit and Loss Appropriation Account

Working Notes

Working Note 1: Adjustment for Babita’s gross fee guarantee

Working Note 2: Calculation of profit shares before Sona’s guarantee

Working Note 3: Sona’s guarantee deficiency

Working Note 4: Final profit shares after guarantee adjustment

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