Question

A, B and C were partners in a firm having capitals of ₹ 50,000 ; ₹ 50,000 and ₹ 1,00,000 respectively. Their Current Account balances were A: ₹ 10,000; B: ₹ 5,000 and C: ₹ 2,000 (Dr.). According to the Partnership Deed the partners were entitled to an interest on Capital @ 10% p.a. C being the working partner was also entitled to a salary of ₹ 12,000 p.a. The profits were to be divided as:
(a) The first ₹ 20,000 in proportion to their capitals.
(b) Next ₹ 30,000 in the ratio of 5 : 3 : 2.
(c) Remaining profits to be shared equally.
The firm earned net profit of ₹ 1,72,000 before charging any of the above items.
Prepare Profit and Loss Appropriation Account and pass necessary Journal entry for the appropriation of profits.

Answer 1

Profit and Loss Appropriation Account
Dr.				Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
Interest on Capital:			Profit and Loss A/c (Net Profit)	1,72,000
A	5,000
B	5,000
C	10,000	20,000
Salary to C		12,000
Profit transferred to:
A’s Current A/c	50,000
B’s Current A/c	44,000
C’s Current A/c	46,000	1,40,000
		1,72,000		1,72,000

Journal Entries
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
	Interest on Capital A/c	Dr.		20,000
	To A’s Current A/c				5,000
	To B’s Current A/c				5,000
	To C’s Current A/c				10,000
	(Interest on partners’ capital allowed to partners)
	Salary A/c	Dr.		12,000
	To C’s Current A/c				12,000
	(Salary allowed to C)
	Profit and Loss Appropriation A/c	Dr.		1,40,000
	To A’s Current A/c				50,000
	To B’s Current A/c				44,000
	To C’s Current A/c				46,000
	(Profit available for distribution transferred to partners’ current accounts)

Working Notes:

WN 1 Calculation of Interest on Capital

WN 2 Calculation of Profit Share of each Partner

Profits available for Distribution = 1,72,000 − 20,000 − 12,000

= Rs 1,40,000

1. Distribution of first Rs 20,000 in the Capital Ratio i.e. 1:1:2

2. Distribution of Next Rs 30,000 in the ratio of 5:3:2

3. Remaining Profit available for distribution = Rs 1,40,000 − 20,000 − 30,000 = Rs 90,000

This profit of Rs 90,000 is to be shared equally by the partners.

Therefore,

Total Profit Share of A = 5,000 + 15,000 + 30,000 = Rs 50,000

Total Profit Share of B = 5,000 + 9,000 + 30,000 = Rs 44,000

Total Profit Share of C = 10,000 + 6,000 + 30,000 = Rs 46,000