Definition of Profit and Loss Appropriation Account

A Profit and Loss Appropriation Account is a nominal account specific to partnership firms, acting as an extension of the Profit and Loss Account. After the Profit and Loss Account, it is prepared to distribute net profits or losses among partners according to their agreed-upon profit-sharing ratio. The account is credited with net profits and debited with net losses, as well as other appropriations like interest on capital, salaries, fees, commissions, bonuses, and transfers to reserves. It also records interest on drawings and interest on debit balances in current accounts on the credit side. Reserves for future needs are created from this account. This account is not used for income tax purposes; the partnership deed or agreement guides its preparation.

Features of Profit and Loss Appropriation Account 

• Profit and loss Appropriation account is a special type of account.
• Profit and loss Appropriation account is a nominal account.
• It is prepared to distribute the Net profits/Net Losses among the partners. (According to their profit-sharing ratio).
• Profit and loss Appropriation account is an extension of Profit and Loss account.
• Prepared after preparing Profit and Loss Account.
• This account is prepared based on the partnership deed or agreement.
• This account is prepared by partnership firms only.
• No use of this account for income tax purposes.
• This account is credited with the amount of net profit and debited with the amount of net loss.
• To prepare it, first, the balance of the Profit and Loss Account is transferred to this account.
• All the appropriations like Interest on capital, Partner’s salaries, Partner’s fees, Partner’s commission, Partner’s bonus, transfer to reserve, etc. are recorded on the debit side of this account.
• The net profit (transfer from profit and loss account), interest on drawings, Interest on the Current Account (charged on the Debit balance of current account) are recorded on the credit side of this account.
• Reserves required for the future are created from this account.

The debit side of Profit and loss Appropriation Account records:

1.  Interest on Partner’s Capital
2. Partner’s Salary
3. Partner’s Fees
4. Partners Commission
5. Partners Bonus
6. Transfer to General Reserves

The credit side of Profit and loss Appropriation Account records:

1. Net Profit (Profit transfer from Profit and Loss Account)
2. Interest on Partner’s drawings
3. Interest on Current Account (Charged on debit Balance)

PURPOSE OF PROFIT AND LOSS APPROPRIATION ACCOUNT

To know the distribution of profit among partners.

To show how much is payable to partners in the form of salary, bonus, fees, commission, interest on capital etc. these all are debited to Profit and Loss Appropriation Account.

To show how much interest on drawings Charged on partner’s drawings at the credit side of the Profit and Loss Appropriation Account.

To create reserve from the profits for the future.

To distribute the profits among the partners in profit sharing ratio.

To distribute the Losses among the partners in profit sharing ratio

Also Read: Partnership Deed

The journal entries for the preparation of the Profit and Loss Appropriation Account are given below:

1. For transfer of the balance of Profit and Loss Account to Profit and Loss Appropriation Account

here

(a) In the case of Net Profit :

Profit and Loss A/c Dr.

To Profit and Loss Appropriation A/c

(Net Profit transferred to Profit and Loss Appropriation A/c)

(b) In case of Net Loss :

Profit and Loss Appropriation A/c Dr.

To Profit and Loss A/c

(Net Loss transferred to Profit and Loss Appropriation A/c)

2. For Interest on Partner’s Capital

a) Interest allowed on capital-

Interest on Capital A/c Dr. (Expenses Increase Debit)

To Partner’s Capital/Current A/c (Capital Increase Credit)

(Interest allowed on capital)

b) For Interest on Partner’s Capital transfer to profit and Loss Appropriation Account-

Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c

(Interest on capital transferred to Profit & Loss Appropriation A/c)

3. For Interest on Paertner’s Drawings

a) Interest charged on Drawing

Partner’s Capital/Current A/c (Capital Decrease Debit)

To Interest on Drawings A/c (Income Increase Credit)

(Interest charged on Drawing)

b) For Interest on Partner’s Drawings transfer to Profit and Loss Appropriation Account-

Interest on Drawings A/c Dr.

To Profit and Loss Appropriation A/c

(Interest on drawing transferred to Profit & Loss Appropriation A/c)

4. For salary/Bonus payable to Partner’s

a) Salary/Bonus allowed –

Partner’s Salary/Bonus A/c Dr. (Expenses Increase Debit)

To Partner’s Capital/Current A/c (Capital Increase Credit)

(Salary/Bonus allowed to partner’s)

b) For transfer of partner’s Salary/Bonus to Profit and Loss Appropriation Account-

Profit and Loss Appropriation A/c Dr.

To Partner’s Salary / Bonus A/c

(Partner’s Salary/Bonus transferred to profit & Loss Appropriation A/c)

5. For Commission Payable to Partner’s

a) Commission allowed to partners for their services –

Partner’s Commission A/c Dr. (Expenses Increase Debit)

To Partner’s Capital/Current A/c (Capital Increase Credit)

(Commission allowed to partner’s)

b) For Partner’s Commission transfer to profit and Loss Appropriation Account-

Profit and Loss Appropriation A/c Dr.

To Partner’s Commission A/c

(Partner’s Commission transferred to Profit and Loss Appropriation A/c)

6. For Transfer of agreed amount to General Reserve from profit and Loss appropriation Account –

Profit and Loss Appropriation A/c Dr.

To General Reserve A/c

(Profit Transfer to General Reserve)

7. For the share of Profit or Loss transfer

(a) In case of  Profit

Profit and Loss Appropriation A/c Dr.

To Partner’s Capital/Current A/c

(Profit transferred to Partner’s capital/current A/c)

 (b) In case of  Loss

Partner’s Capital/ Current A/c Dr.

To Profit and Loss Appropriation A/c

(Loss transferred to capital/current A/c)

Also Read: Trial Balance format definition and methods

In case of Fixed capital Method Used current Account.

In case of Fluctuating Capital Method Used Capital Account

* Format of Profit and Loss Appropriation Account*

Difference between Profit & Loss Account and Profit & Loss Appropriation Account

1. Stage- Profit & Loss account is prepared after the Trading account whereas, Profit & Loss Appropriation account is prepared after the Profit & Loss Account.
2. Basis- preparation of profit and loss account is not based on partnership agreement, whereas, Preparation of Profit & Loss appropriation account is solely based on partnership agreement.
3. Purpose- Profit and Loss account is prepared to know the net profits of the business, whereas,  Profit & Loss appropriation account is prepared to distribute the profits as shown by Profit & Loss A/c among the partners.
4. Opening and closing balance- Profit and Loss account has no opening as well as closing balances whereas, Profit & Loss appropriation account may have opening as well as closing balances.
5. Recording-Income and expenses charged against profit are shown profit and loss account whereas, All the appropriations like Interest on capital, Partner’s salaries, Partner’s fees, Partner’s commission, Partner’s bonus, transfer to reserve, etc. are recorded profit and loss appropriation account.

ISC 12 fundamentals of partnership questions (previous papers)