Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed

Numerical Questions · Q30

Q. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed Rs. 10,000 as her share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are Rs. 40,000 and 60,000 respectively. 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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We need to prepare the Profit and Loss Appropriation Account for two years. The key is the guarantee: Kusum is guaranteed ₹10,000. Any shortfall is borne only by Siddharth (not by Abhay). The profit-sharing ratio is 5:3:2.

Year 1: 2015-16 (Profit ₹40,000)

First, distribute the profit in the ratio 5:3:2.

Abhay: 5/10 × 40,000 = ₹20,000
Siddharth: 3/10 × 40,000 = ₹12,000
Kusum: 2/10 × 40,000 = ₹8,000

Kusum gets only ₹8,000, but she is guaranteed ₹10,000. Deficiency = ₹2,000. This deficiency is borne entirely by Siddharth. So, Siddharth’s share is reduced by ₹2,000, and Kusum’s share is increased by ₹2,000.

Final shares:

Abhay: ₹20,000
Siddharth: ₹12,000 – ₹2,000 = ₹10,000
Kusum: ₹8,000 + ₹2,000 = ₹10,000

Profit and Loss Appropriation Account for the year ending March 31, 2016

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Profit & Loss A/c (Net Profit)	40,000
Abhay’s Capital A/c	20,000
Siddharth’s Capital A/c	10,000
Kusum’s Capital A/c	10,000
Total	40,000	Total	40,000

Year 2: 2016-17 (Profit ₹60,000)

Distribute in the ratio 5:3:2.

Abhay: 5/10 × 60,000 = ₹30,000
Siddharth: 3/10 × 60,000 = ₹18,000
Kusum: 2/10 × 60,000 = ₹12,000 …

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For 2015-16: Profit distributed — Abhay ₹20,000, Siddharth ₹10,000, Kusum ₹10,000. For 2016-17: Profit distributed — Abhay ₹30,000, Siddharth ₹18,000, Kusum ₹12,000.

The core concept here is a Guarantee of Profit — a minimum profit assured to a partner, with any shortfall borne by another partner (or partners) as per the partnership deed. In this case, Kusum is guaranteed ₹10,000 per year. If her share of profit (computed in the normal profit-sharing ratio) falls short of ₹10,000, the deficiency is to be met personally by Siddharth. This means Siddharth’s share is reduced by the deficiency amount, and Kusum’s share is increased to the guaranteed minimum.

The accounting treatment is straightforward: the Profit and Loss Appropriation Account is prepared first, distributing the profit in the agreed ratio (5:3:2). Then, if Kusum’s share is less than ₹10,000, we adjust by transferring the deficiency from Siddharth’s capital account to Kusum’s capital account. This adjustment is done outside the Appropriation Account — it is a personal adjustment between partners, not a charge on profits. The Appropriation Account shows the initial distribution in the profit-sharing ratio; the guarantee adjustment is recorded as a journal entry between the partners’ capital accounts.

Let’s work through each year.

Year 1: Year ending March 31, 2016 (Profit ₹40,000)

Step 1: Distribute profit in the ratio 5:3:2

Total profit = ₹40,000

Abhay’s share = 5/10 × ₹40,000 = ₹20,000

Siddharth’s share = 3/10 × ₹40,000 = ₹12,000

Kusum’s share = 2/10 × ₹40,000 = ₹8,000

Step 2: Check guarantee

Kusum’s share (₹8,000) is less than the guaranteed ₹10,000. Deficiency = ₹10,000 – ₹8,000 = ₹2,000.

This deficiency is to be borne by Siddharth. So Siddharth’s share is reduced by ₹2,000, and Kusum’s share is increased by ₹2,000.

Step 3: Final distribution after guarantee adjustment

Abhay: ₹20,000 (unchanged)

Siddharth: ₹12,000 – ₹2,000 = ₹10,000

Kusum: ₹8,000 + ₹2,000 = ₹10,000

Profit and Loss Appropriation Account for the year ending March 31, 2016

Particulars	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to:		By Net Profit	40,000
Abhay’s Capital A/c	20,000
Siddharth’s Capital A/c	12,000
Kusum’s Capital A/c	8,000
Total	40,000	Total	40,000

Note

The Appropriation Account shows the initial distribution in the profit-sharing ratio. The guarantee adjustment is recorded separately as a journal entry between partners’ capital accounts.

Journal entry for guarantee adjustment:

Date	Particulars	Debit (₹)	Credit (₹)
2016 Mar 31	Siddharth’s Capital A/c Dr.	2,000
	To Kusum’s Capital A/c		2,000
	(Being deficiency in Kusum’s guarantee met by Siddharth)

Ledger Accounts (Capital Accounts) after adjustment:

Abhay’s Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance c/d	20,000	By Profit & Loss Appropriation A/c	20,000
Total	20,000	Total	20,000

Siddharth’s Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Kusum’s Capital A/c	2,000	By Profit & Loss Appropriation A/c	12,000
To Balance c/d	10,000
Total	12,000	Total	12,000

Kusum’s Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance c/d	10,000	By Profit & Loss Appropriation A/c	8,000
		By Siddharth’s Capital A/c	2,000
Total	10,000	Total	10,000

Year 2: Year ending March 31, 2017 (Profit ₹60,000)

Step 1: Distribute profit in the ratio 5:3:2

Total profit = ₹60,000

Abhay’s share = 5/10 × ₹60,000 = ₹30,000

Siddharth’s share = 3/10 × ₹60,000 = ₹18,000 …

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Year 1: Year ending March 31, 2016 (Profit ₹40,000)

Year 2: Year ending March 31, 2017 (Profit ₹60,000)

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