Q.Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively on October 01, 2019. Aakriti Advanced. Rs. 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31 2020 showed profit of Rs. 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them by preparing Profit and Loss Appropriation Account. Also give reasons in Support of your answer.

Since there is no partnership agreement, the provisions of the Indian Partnership Act, 1932 apply. Under the Act:

• No interest is allowed on capital.
• No interest is charged on drawings.
• Interest on loan by a partner is payable at 6% p.a. (even without agreement).
• Profits are shared equally after all adjustments.

Step 1 – Interest on Aakriti’s Loan

Loan advanced on October 01, 2019. Period = 6 months (Oct 2019 to Mar 2020).

Interest = ₹20,000 × 6% × 6/12 = ₹600.

Step 2 – Profit after interest on loan

Profit as per P&L = ₹43,000

Less: Interest on loan (charge against profit) = ₹600

Profit available for appropriation = ₹42,400

Step 3 – Equal division

Aakriti’s share = ₹42,400 ÷ 2 = ₹21,200

Bindu’s share = ₹42,400 ÷ 2 = ₹21,200

Profit and Loss Appropriation Account for the year ended March 31, 2020

Concept and Accounting Treatment

When partners start a firm without a written partnership deed, the Indian Partnership Act, 1932 fills the gaps. The Act lays down default rules for situations the partners haven't agreed upon. For this question, three rules are critical:

1. Interest on Capital – No interest is allowed on capital unless the partnership deed expressly provides for it. Since there is no agreement, Aakriti and Bindu get zero interest on their capital contributions.
2. Interest on Loan by a Partner – If a partner gives a loan to the firm, the Act allows interest at 6% per annum, even without an agreement. Aakriti advanced ₹20,000 as a loan on October 1, 2019. She is entitled to interest on that loan for the period from October 1, 2019 to March 31, 2020 (6 months) at 6% p.a.
3. Division of Profits – Profits are shared equally among all partners, regardless of the amounts of capital they contributed. So Aakriti and Bindu share the remaining profit equally.

The Profit and Loss Appropriation Account is the formal statement that shows how the net profit (from the Profit and Loss account) is distributed among the partners. It is prepared after charging all expenses and incomes of the firm. Here, the only item to be charged before dividing profit is the interest on Aakriti's loan. That interest is a charge against profit (not an appropriation), so it is debited to the Profit and Loss Account (not the Appropriation Account). But the question gives us the profit after all such charges? Let's check carefully.

The problem states: "Profit and Loss account for the year ended March 31 2020 showed profit of ₹43,000." This is the net profit before any appropriation (like interest on capital, salary, etc.) but after all expenses and incomes of the business. Interest on a partner's loan is an expense of the firm, so it should have been recorded in the Profit and Loss account. However, the problem says the partners could not agree on interest, implying it was not recorded. Therefore, we must first calculate the interest on Aakriti's loan and treat it as an expense, reducing the profit. Then the remaining profit is divided equally.

Solution: Profit and Loss Appropriation Account

Working Notes:

1. Interest on Aakriti's Loan

   • Loan amount: ₹20,000
   • Rate: 6% per annum
   • Period: October 1, 2019 to March 31, 2020 = 6 months
   • Interest = 20,000 × 6/100 × 6/12 = ₹600

2. Profit after charging interest on loan

   • Profit as per P&L account: ₹43,000
   • Less: Interest on Aakriti's loan (charge): ₹600
   • Profit available for appropriation: ₹42,400

3. Division of profit

   • Since no agreement, profit shared equally.
   • Aakriti's share = 42,400 / 2 = ₹21,200
   • Bindu's share = 42,400 / 2 = ₹21,200

Now we prepare the Profit and Loss Appropriation Account.