Question

1. Where would you record “Rent paid to Partner” while preparing P/L Appropriation A/c


2. Why don’t we show Manager’s Commission and Interest on Partner’s Loan in P/L Appropriation

Account?


3. What should we do when appropriations are more than the profits?


4. What do understand by the following:

(a) When ‘Interest on capital is Treated as an appropriation’

(b)When “Interest on capital is Treated as a charge


5. David and John were partners in a firm sharing profits in the ratio of 4 : 1. Their capitals on 1.4.2006

were : David Rs.2,50,000 and John Rs.50,000. The partnership deed provided that David will get a

commission of 10% on the net profit after allowing a salary of Rs.2,500 per month to John. The profit of

the firm for the year ended 31.3.2007 was Rs.1,40,000. Prepare Profit and Loss Appropriation Account

for the year ended 31.3.2007. ​

Answer 1

Answer:

1) Since rent paid to partner is a charge rather than appropriation, it will be deducted from Net profit which appears on credit side of P/l app. account.

2) Both Manager’s Commission and Interest on Partner’s Loan are charge and not appropriations, you have to pay them irrespective of the fact that you earned profit or not. Thus, they are debited in P/L Accounts, or deducted from Net profit which appears on credit side of P/l app. account.

3) If appropriations are more than profits, you should first check what is the ratio in which the appropriations are to be made among partners.

Example) Lets say there are 3 partners A, B and C, and the appropriation is interest on capital. Assume the profit sharing ratio to be 1:2:3 . now lets say the interest on capitals will be 50,000 each, so minimum profit should be 1.5 lakhs so as to give interest to partners. But the profit earned is only 1,20,000. So since the ratio of appropriation is 1:1:1 ( Cause all have to get 50000 each) , 120000 will be divided in 1:1:1, with each partner getting 40,000 each.

4) A) When Interest on capital is Treated as an appropriation, interest is provided only when firm earns profit.

B)When Interest on capital is Treated as a charge, firm has to give interest to partners even if it incurs loss.

5) Just provide salary of 30000 to john, then the remaining profit will be 110000, give 11000 to david as commission, and distribute remaining 99000 in 4:1 . So david will get 79200 and John wll get 19800.

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