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Question

A, B and C are partners in a firm. Their profit-sharing ratio is 2 : 2 : 1. C is guaranteed a minimum of ₹ 10,000 as share of profit every year. Any deficiency arising on that amount shall be met by B. The profits for the two years ended 31st March, 2018 and 2019 were ₹ 40,000 and ₹ 60,000 respectively. Prepare Profit and Loss Appropriation Account for the two years.

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Solution

Profit and Loss Appropriation Account

for the year ended 31st March, 2018

Dr. Cr.

Particulars

Amount

(₹)

Particulars

Amount

(₹)

Profit transferred to: (WN 1)

Profit and Loss A/c (Net Profit)

40,000

A’s Capital A/c

16,000

B’s Capital A/c

14,000

C’s Capital A/c

10,000

40,000

40,000

40,000

Profit and Loss Appropriation Account

for the year ended 31st March, 2019

Dr. Cr.

Particulars

Amount

(₹)

Particulars

Amount

(₹)

Profit transferred to:

Profit and Loss A/c (Net Profit)

60,000

A’s Capital A/c

24,000

B’s Capital A/c

24,000

C’s Capital A/c

12,000

60,000

60,000

60,000


Working Notes:

WN 1 Distribution of Profit for the year 2017-18

Profit for 2018 = Rs 40,000

Profit sharing ratio = 2 : 2 : 1

C is given a guarantee of minimum profit of Rs 10,000

Deficiency in C’s Profit Share = 10,000 − 8,000 = Rs 2,000

This deficiency is to be borne by B.

Therefore,

Final Profit Share of A = 16,000

Final Profit Share of B = 16,000 2,000 = Rs 14,000

Final Profit Share of C = 8,000 + 2,000 = Rs 10,000


WN 2 Distribution of Profit for the year 2018-19

Profit for 2019 = Rs 60,000

Profit sharing ratio = 2 : 2 : 1

C is given a guarantee of minimum profit of Rs 10,000


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