Question

Pranshu and Himanshu are partners sharing profits and losses in the ratio of 3.2 respectively. They admit Anshu as partner with 1/6 share in the profits of firm. Pranshu personally guaranteed that Anshu's share of profit would not be less than 30,000 in any year. The net profit of the firm for the year ending 31st March, 2019 was 90,000. Prepare Profit and Loss Appropriation Account.​

Answer 1

Given data:

• Pranshu and Himanshu are partners in a firm sharing profits and losses in the ratio 3:2.
• Anshu is admitted into the firm for 1/6th of the profits.
• Pranshu guaranteed a minimum of Rs 30,000 to Anshu.
• The profit for the year was Rs 90,000.

Objective: To prepare a Profit & Loss Appropriation A/c.

Answer:

• Pranshu's old share = 3/5
• Himanshu's old share = 2/5
• Anshu's share = 1/6

Let the total profit be assumed as 1.

The remaining profit = 1 - 1/6 = 5/6

Since there is no specific ratio as to how Anshu will get 1/6 of the profits from Pranshu and Himanshu, the remaining profit will be distributed among the old partners in their old profit-sharing ratio, i.e., 3:2.

Calculation of the new profit-sharing ratio:

For Pranshu:

• New ratio = 3/5 × 5/6 = 15/30

For Himanshu:

• New ratio = 2/5 × 5/6 = 10/30

For Anshu:

• New ratio = 1/6, or 5/30

Therefore, the new profit-sharing ratio is 15:10:5, or 3:2:1.

Calculation of the profit distribution:

Since they now share their profits in the ratio 3:2:1, the profit of Rs 90,000 will need to be distributed accordingly.

For Pranshu:

• Profit share = Rs 90,000 × 3/6 = Rs 45,000

For Himanshu:

• Profit share = Rs 90,000 × 2/6 = Rs 30,000

For Anshu:

• Profit share = Rs 90,000 × 1/6 = Rs 15,000

Deficiency of Anshu = Guaranteed profit - Actual profit acquired

Deficiency of Anshu = Rs 30,000 - Rs 15,000

Deficiency of Anshu = Rs 15,000

Anshu received only Rs 15,000 as profit. Since Anshu was guaranteed a profit of at least Rs 30,000 by Pranshu, the deficiency arising will be met by Pranshu, i.e., Rs 15,000 will be deducted from Pranshu's share and added to Anshu's share.

Corrected profit distribution:

For Pranshu:

• Profit share = Rs 45,000 - Rs 15,000 = Rs 30,000

For Himanshu:

• Profit share = Rs 30,000

For Anshu:

• Profit share = Rs 15,000 + Rs 15,000 = Rs 30,000

Profit shares will be recorded on the debit side of the appropriation a/c.

The Profit & Loss Appropriation A/c has been attached below.