The compilation of these Accounting for Partnership Notes makes students exam preparation simpler and organised.
Distribution of Profit Among Partners
As we know a partnership is where two or more persons work together and distribute among themselves all profits and losses. But how exactly will this distribution of profit take place? Let us see the accounting entries and effects of the distribution of profit.
Distribution of Profit Among Partners
In accordance with the provisions of the partnership deed, the profits and losses made by the firm are distributed among the partners. However, sharing of profit and losses is equal among the partners, if the partnership deed is silent.
However, certain adjustments such as interest on drawings & capital, salary & commission to partners are required to be made. For this purpose, it is customary to prepare a Profit and Loss Appropriation Account of the firm. The final figure of profit and loss to be distributed among the partners is ascertained by the Profit and Loss Appropriation Account.
Profit and Loss Appropriation Account
After the Profit and Loss Account, Profit and Loss Account Appropriation is prepared for the firm. In this account how the profit or loss among the partners of the firm is distributed is shown. Through this account, all adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made.
It starts with the net profit/net loss as per Profit and Loss Account is transferred to this account. The journal entries for preparation of Profit and Loss Appropriation Account and making various adjustments through it are given as follows:
Journal Entries for Distribution of Profit
1. Transfer of the balance of Profit and Loss Account to Profit and Loss Appropriation Account
If Profit and Loss Account shows a credit balance (net profit):
If the Profit and Loss Account shows a debit balance (net loss)
2. Interest in Capital
For crediting interest on capital to partners’ capital account:
For transferring interest on capital to Profit and Loss Appropriation Account:
3. Interest on Drawings
For charging interest on drawings to partners’ capital accounts:
For transferring interest on drawings to Profit and Loss Appropriation Account:
4. Partner’s Salary
For crediting partner’s salary to partner’s capital account:
For transferring partner’s salary to Profit and Loss Appropriation Account:
5. Partner’s Commission
For crediting the commission to a partner, to partner’s capital account:
For transferring commission paid to partners to Profit and Loss Appropriation Account.
6. The share of Profit or Loss after appropriations
If Profit:
If Loss:
The Performa of Profit and Loss Appropriation Account is given as follows:
Profit and Loss Appropriation Account
Example:
Question:
Avi, Bob, and Charles set up a partnership firm on April 1, 2018. They contributed Rs. 50,000, Rs. 30,000 and Rs. 20,000, respectively as their capitals and agreed to share profits and losses in the ratio of 5 : 3 : 2. The salary of Avi is Rs. 1,000 per month and Bob, a Commission of Rs. 10,000. Interest on capital at 10% p.a.
The drawings for the year were Avi Rs. 10,000, Bob Rs. 5,000, and Charles Rs. 2,000. Interest in drawings of Rs. 1000 was charged on Avi’s drawings, Rs. 500 on Bob’s drawings and Rs. 200, on Charles’s drawings. The net profit as per the Profit and Loss Account for the year ending March 31, 2018, was Rs. 36300.
Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.
Solution:
Profit and Loss Appropriation Account
