Profit and Loss Appropriation Account - Class 12 Partnership Accounts Fundamental

 What in this Article ??

1. What are included in Final Account of a Partnership Firm
2. Profit & Loss Appropriation Account
3. What if profit is not adequate to meet the appropriations?
4. Net Profit
5. Divisible Profit
6. Charge against Profit
7. Format for Profit & Loss Appropriation Account

1. What are included in Final Account of a Partnership Firm

1. Trading Account
2. Profit & Loss Account
3. Profit & Loss Appropriation Account
4. Balance Sheet

2. Why Profit & Loss Appropriation Account is prepared

Unlike sole-proprietorship, in partnership, certain adjustments such as interest on drawings, interest on capital, salary to partners, and commission to partners are required to be made. For this purpose, a Profit and Loss Appropriation Account of the firm is prepared to ascertain the final figure of profit and loss to be distributed among the partners, in their profit sharing ratio.

3.  Profit & Loss Appropriation Account

• It is an extension of Profit and Loss Account prepare for the purpose of distribution of profit.
• It is credited with amount of Net profit, Interest on drawing charged.
• Debited with Net loss, Interest on capital paid, salaries & commission paid to partners, amount transferred to reserves.
• Balancing figure is transferred to partners’ capital /current account as per agreed ratio.

3. What if profit is not adequate to meet the appropriations?

• If profit is not adequate to meet appropriations, appropriation is made up to the amount of available profit.
• Determine the amount of appropriation under each head for each partner as per the Partnership Deed
• Total the appropriations for each partner
• It is the ratio in which Divisible Profit is distributed

4. Net Profit

• It is the profit earned by the firm from its operating and non-operating activities.
• It is determined by preparing Profit and Loss Account

5.  Divisible Profit

• It is that amount of profit, that is available for distribution among partners after adjustment of partners’ salary’/ commission, interest on capital, drawing, transfer to reserve, etc.
• It is determined by preparing Profit and Loss Appropriation Account
• In case of Net Profit: Divisible Profit is the amount of Net Profit plus Interest on Drawings less remuneration to partners, interest on capital and transfer to reserve(s).
• In case of Net Loss: Divisible Profit is the amount of Net Loss less Interest on Drawings If the net amount is credit balance less remuneration to partners, interest on capital and transfer to reserve(s).

6. Charge against Profit

• Charge against profit means an expense that has to be incurred (paid or payable), whether the firm earns profit or incurs loss during the year
• It is a component of Profit and Loss Account meaning it leads to determining correct profit or loss for the year
• Rent, Electricity Expenses, Depreciation, Amortisation, Salaries to Employees, Manager’s Commission etc.

7. Format for Profit & Loss Appropriation Account