Lesson

Profit and Loss Appropriation Account

Learn how partnership profit is adjusted and distributed among partners.

Understand how partnership net profit is adjusted for partner salary, interest, reserve, and then shared in the profit sharing ratio.

Beginner12-15 min

Concept explanation

Understand the idea first

What is Profit and Loss Appropriation Account?

Profit and Loss Appropriation Account is prepared in partnership accounts to show how net profit is distributed among partners.

Profit and Loss Account tells us the net profit of the business.

But in partnership, that net profit does not belong to one person.

It must be divided among partners according to the partnership deed.

Before sharing profit, the firm may give interest on capital, partner salary, and partner commission.

The firm may also charge interest on drawings.

Then the remaining profit is shared in the profit sharing ratio.

Simple line: P&L Appropriation Account shows how partnership profit is adjusted and shared.

Why this account is needed

In sole proprietorship, there is one owner and profit belongs to that owner.

In partnership, there are two or more partners.

So the firm must answer who gets how much profit.

It must check whether any partner gets salary or commission.

It must check whether interest on capital is allowed.

It must check whether interest on drawings is charged.

It must check whether some profit is kept as reserve.

Memory line: P&L Account finds profit. P&L Appropriation Account divides profit.

Simple story

Riya and Amit run a small stationery shop together.

At the end of the year, the shop earns net profit of Rs.80,000.

Their partnership deed says Amit will get salary Rs.10,000 because he manages the shop daily.

Riya will get interest on capital Rs.6,000.

Amit will get interest on capital Rs.4,000.

Amit has drawings interest Rs.1,000.

Remaining profit will be shared equally.

Can they simply divide Rs.80,000 equally?

No. First, they must apply the rules in the partnership deed.

This is done through Profit and Loss Appropriation Account.

Items shown in P&L Appropriation Account

The credit side usually includes Net Profit and Interest on Drawings.

The debit side usually includes Interest on Capital, Partner Salary, Partner Commission, Transfer to Reserve, and Share of Profit transferred to partners.

Interest on drawings increases the amount available for distribution because it is charged from partners.

Interest on capital, partner salary, partner commission, and reserve reduce the profit available for final sharing.

If there is a net loss, it may be shared among partners in the profit sharing ratio after applying relevant adjustments carefully.

Keep the idea simple: this account adjusts profit and then shares the balance.

How profit is distributed

Step 1: Start with Net Profit.

Step 2: Add interest on drawings if any.

Step 3: Deduct interest on capital.

Step 4: Deduct partner salary or commission.

Step 5: Deduct transfer to reserve if any.

Step 6: Share remaining profit among partners in the profit sharing ratio.

Simple idea: Available profit for sharing starts with net profit, adds interest on drawings, and deducts partner benefits and reserve.

Interest on capital

Interest on Capital is given to partners for investing capital in the business.

Example: Riya's capital is Rs.60,000 and interest on capital is 10%.

Interest is Rs.60,000 x 10% = Rs.6,000.

Treatment: debit P&L Appropriation Account and credit partner's capital or current account.

Simple line: Interest on capital is a benefit given to partner.

Partner salary and commission

Sometimes one partner works more than others.

Example: Amit manages the shop every day.

The deed may say Amit gets salary Rs.10,000.

Treatment: debit P&L Appropriation Account and credit Amit's capital or current account.

Partner commission works similarly.

Simple line: Partner salary or commission rewards extra work by partner.

Interest on drawings

Interest on Drawings is charged when a partner withdraws money or goods for personal use.

Example: Amit's drawings are Rs.20,000 and interest on drawings is 5%.

Interest is Rs.20,000 x 5% = Rs.1,000.

Treatment: credit P&L Appropriation Account and debit partner's capital or current account.

Simple line: Interest on drawings is charged from partner.

Transfer to reserve

Sometimes the firm keeps part of profit aside for future use.

Example: transfer to reserve Rs.5,000.

Treatment: debit P&L Appropriation Account.

Reserve reduces the profit available for sharing now.

Simple line: Reserve means profit kept aside for future safety or growth.

Profit sharing ratio

After all appropriations, remaining profit is shared among partners in their profit sharing ratio.

Example: remaining profit Rs.60,000 and Riya and Amit share equally.

Riya gets Rs.30,000 and Amit gets Rs.30,000.

Example: remaining profit Rs.50,000 shared in 3:2.

Total parts are 5. Partner A gets Rs.50,000 x 3/5 = Rs.30,000.

Partner B gets Rs.50,000 x 2/5 = Rs.20,000.

Simple line: Profit sharing ratio decides the final share of remaining profit.

Simple comparison

P&L Account vs P&L Appropriation Account

Profit and Loss Account	Profit and Loss Appropriation Account
Finds net profit or net loss	Shows how net profit is distributed
Used in all businesses	Mainly important in partnership
Includes normal expenses and incomes	Includes partner-related adjustments
Example: rent, salary, depreciation	Example: interest on capital, partner salary, profit share
Ends with net profit	Starts with net profit

Memory line: P&L Account finds the profit. P&L Appropriation Account shares the profit.

Appropriation guide

How common items affect appropriation

Item	Simple meaning	Usual side / effect
Net Profit	Profit found by P&L Account	Credit side / starting point
Interest on Drawings	Charged from partner	Credit side / increases available profit
Interest on Capital	Benefit for capital invested	Debit side / deducted before sharing
Partner Salary	Reward for extra work	Debit side / deducted before sharing
Partner Commission	Reward for special work or sales	Debit side / deducted before sharing
Transfer to Reserve	Profit kept aside	Debit side / reduces remaining profit
Share of Profit	Final profit given to partners	Debit side / shared in ratio

Read the partnership deed first; partner benefits are allowed only when the deed allows them.

Visual flow

Mental model

Net Profit

Add Interest on Drawings

Less Interest on Capital

Less Partner Salary or Commission

Less Transfer to Reserve

Remaining Profit

Share among partners in ratio

Solved examples

See the rule in action

Example 1

Net Profit Rs.60,000. Riya and Amit share equally.

Net Profit Rs.60,000
Riya's share Rs.30,000
Amit's share Rs.30,000

Equal sharing means 1:1.

Each partner gets half of the profit.

Example 2

Net Profit Rs.50,000. Riya and Amit share in 3:2.

Total parts = 3 + 2 = 5
Riya = Rs.50,000 x 3/5 = Rs.30,000
Amit = Rs.50,000 x 2/5 = Rs.20,000

Profit is divided in the profit sharing ratio.

Riya gets three parts and Amit gets two parts.

Example 3

Net Profit Rs.80,000. Interest on capital: Riya Rs.6,000, Amit Rs.4,000. Remaining profit shared equally.

Total Interest on Capital Rs.10,000
Remaining Profit = Rs.80,000 - Rs.10,000 = Rs.70,000
Each partner's profit share Rs.35,000
Riya total = Rs.6,000 + Rs.35,000 = Rs.41,000
Amit total = Rs.4,000 + Rs.35,000 = Rs.39,000

Interest on capital is allowed before sharing remaining profit.

Then the remaining profit is shared equally.

Example 4

Net Profit Rs.90,000. Amit salary Rs.20,000. Remaining profit shared equally.

Remaining Profit = Rs.90,000 - Rs.20,000 = Rs.70,000
Each partner's profit share Rs.35,000
Amit total benefit = Salary Rs.20,000 + Profit Share Rs.35,000
Amit total benefit Rs.55,000

Partner salary is deducted before sharing profit.

The balance is shared equally.

Example 5

Net Profit Rs.70,000. Interest on Amit's drawings Rs.2,000. Remaining profit shared equally.

Available Profit = Rs.70,000 + Rs.2,000
Available Profit Rs.72,000
Each partner's profit share Rs.36,000
Amit is also charged interest on drawings in his capital/current account

Interest on drawings is charged from partner.

So it is added before sharing profit.

Example 6

Complete simple appropriation.

Net Profit Rs.1,00,000
Add Interest on Drawings Rs.3,000
Total Available Rs.1,03,000
Less Interest on Capital Rs.10,000
Less Amit Salary Rs.10,000
Less Reserve Rs.5,000
Remaining Profit Rs.78,000
Each partner's share Rs.39,000

First add interest charged from partners.

Then deduct partner benefits and reserve.

The remaining profit is shared fairly in the agreed ratio.

Avoid these

Common Mistakes

Sharing profit before giving partner salary or interest on capital

Forgetting to add interest on drawings

Treating interest on drawings as expense

Treating interest on capital as income

Confusing P&L Account with P&L Appropriation Account

Using capital ratio instead of profit sharing ratio

Forgetting transfer to reserve

Giving partner salary even when deed does not allow it

Forgetting that remaining profit is shared in ratio

Thinking salary to partner is same as salary to employee in normal P&L

Practice prompts

Try It Yourself

Net profit Rs.40,000 shared equally between Riya and Amit. Expected: Rs.20,000 each.

Net profit Rs.60,000 shared in 2:1. Expected: Partner A Rs.40,000, Partner B Rs.20,000.

Net profit Rs.80,000. Interest on capital Rs.10,000 total. Remaining profit shared equally. Expected: remaining profit Rs.70,000, each gets Rs.35,000.

Net profit Rs.90,000. Partner salary Rs.30,000. Remaining profit shared equally. Expected: remaining profit Rs.60,000, each gets Rs.30,000.

Net profit Rs.50,000. Interest on drawings Rs.2,000. Does available profit increase or decrease? Expected: increase to Rs.52,000.

Remaining profit Rs.75,000 shared in 3:2. Expected: Partner A Rs.45,000, Partner B Rs.30,000.

Profit sharing ratio is 1:1 but capital ratio is 3:2. Which ratio is used for profit share? Expected: profit sharing ratio 1:1.

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