3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

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Accounting for Partnership

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.

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Objectives of Business Levels of Management

Distribution of Profit among Partners

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

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 Profit and Loss Appropriation Account.

Browse more Topics under Accounting For Partnership

Nature of Partnership and Partnership Deed

Guarantee of Profit to a Partner, Past Adjustments and Final Accounts

Special Aspects of Partnership Accounts and its Maintenance

Learn more about the Nature of Partnership and Partnership Deed here.

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.

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It starts with the net profit/net loss as per Profit and Loss Account is transferred to this 
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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):

Profit and Loss A/c Dr.

To Profit and Loss Appropriation A/c

If Profit and Loss Account shows a debit balance (net loss)

Profit and Loss Appropriation A/c Dr.

To Profit and Loss A/c

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

2] Interest on Capital

For crediting interest on capital to partners’ capital account:

Interest on Capital A/c Dr.

To Partner’s Capital/ Current A/c(individually)

For transferring interest on capital to Profit and Loss Appropriation Account:

Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c

3] Interest on Drawings

For charging interest on drawings to partners’ capital accounts:

Partners Capital/Current A/c’s (individually) Dr.

To Interest on Drawings A/c

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For transferring interest on drawings to Profit and Loss Appropriation Account:
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Interest on Drawings A/c Dr.

To Profit and Loss Appropriation A/c

4] Partner’s Salary

For crediting partner’s salary to partner’s capital account:

Salary to Partner A/c Dr.

To Partner’s Capital/ Current A/c (individually)

For transferring partner’s salary to Profit and Loss Appropriation Account:

Profit and Loss Appropriation A/c Dr.

To Salary to Partner A/c

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

5] Partner’s Commission

For crediting the commission to a partner, to partner’s capital account:

Commission to Partner A/c Dr.

To Partner’s Capital/ Current A/c (individually)

For transferring commission paid to partners to Profit and Loss Appropriation

Account.

Profit and Loss Appropriation A/c Dr.

To Commission to Partner A/c

6] The share of Profit or Loss after appropriations

If Profit:

Profit and Loss Appropriation A/c Dr.

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To Partner’s Capital/ Current A/c’s (individually)

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If Loss:

Partner’s Capital/Current A/c’s (individually) Dr.

To Profit and Loss Appropriation A/c

The Performa of Profit and Loss Appropriation Account is given as follows:

Profit and Loss Appropriation Account

Dr. Cr.

Particulars Amount (Rs.) Particulars Amount (Rs.)

Profit and Loss (if there is a loss) xxx Profit and Loss (if there is profit) xxx

Interest on capital xxx Interest on drawings xxx

Salary to Partner xxx Partners’ Capital a/c (distribution of loss) xxx

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

Commission to Partner xxx

Interest on Partner’s Loan xxx

Partners’ Capital a/c (distribution of profit) xxx

Total xxx Total xxx

Solved Example for You

Example 1:

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. 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 on 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 Profit and Loss Account
for the year ending March 31, 2018, was Rs. 36300.

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Prepare the Profit and Loss Appropriation Account to show the distribution of profit among
the partners.
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Solution:

Profit and Loss Appropriation Account

Dr. Cr.

Amount
Particulars Amount (Rs.) Particulars
(Rs.)

Salary to Avi 12000 Profit and Loss a/c 36300

Interest on capital: Interest on drawings:

Avi 5000 Avi 1000

Bob 3000 Bob 500

Charles 2000 Charles 200

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

Commission to Bob 10000

The share of profit transferred to Capital accounts :

Avi 3000

Bob 1800

Charles 1200

Total 38000 Total 38000

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Nature of Partnership and Partnership Deed Accounting for Partnership: Basic Concepts

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

Ashhar Firdausi Dr. Nazma Shaik Gaurav Tiwari

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Accounting for Partnership

Special Aspects of Partnership Accounts and its Maintenance

Guarantee of Profit to a Partner, Past Adjustments Distribution of Profit Among Partners

Nature of Partnership and Partnership Deed

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Bedare Uttam 

Sir, according to the Wikipedia a partnership has maximum 50 number of partners. But you have mentioned
Guest on this page ” maximum 20″. I have doubt on this statement. So clear this doubt.

 27     Reply  2 years ago 

Nikhil sharma 

Guest According to the partnership act 1932 the max no. of partners is 20 but in act 2013 rule no. 10 the max
no. Of partners is 50….#hope ur doudht will be clear..!

 8   Reply  1 year ago

Ritik Aggarwal 

Guest Read clearly sec 464 of Indian Companies Act 2013 Illegal Association. Rule notify limits 50 for
patnership firm but in case of banking business 10 and for non banking bussiness 20 limits shall apply
bcz Indian partnership Act has not notify max. limits on the no. of partners.

 1   Reply  1 year ago

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3/1/22, 11:42 PM Distribution of Profit among Partners: Profit & Loss Appropriation Account

BROWSE

Accounting for Partnership

Special Aspects of Partnership Accounts and its Maintenance

Guarantee of Profit to a Partner, Past Adjustments

Distribution of Profit Among Partners

Nature of Partnership and Partnership Deed

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