Question

Arum, Sabha and Suresh are partners in a firm. Their profit-sharing ratio is 2:2:1. However, Suresh is guaranteed a minimum amount of Rs 10,000 as share of profit every year. Any deficiency arising on that account shall be met by Babita. The profits for the two years ending 31st March, 2016 and 2017 were Rs 40,000 and Rs 60,000 respectively. Prepare Profit and Loss Appropriation Account for the two years.

Answer 1

PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. For the year ending 31st March, 2016 Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Profit transferred to:}& & \text{Profit \& Loss A/c}& 40,000\\ \text{Aman's Capital A/c 16,000}& 16,000& & \\ \text{Babita's Capital A/c 16,000-2,000}& 14,000& & \\ \text{Suresh's Capital A/c 8,000 +2,000}& 10,000& & \\ & \underset{–}{\overline{40,000}}& & \underset{–}{\overline{40,000}}\end{array}$

Working Note:

$\begin{array}{cc}\text{Share of Profit:}& \text{Aman}:40,000\times \frac{2}{5}=Rs16,000\\ & \text{Babita}:40,000\times \frac{2}{5}=Rs16,000\\ & \text{Suresh}:40,000\times \frac{1}{5}=Rs8,000\\ & \end{array}$

The minimum guaranteed amount to Suresh is Rs 10,000 whereas, his share of profit as per the profit sharing ratio works out to be Rs 8,000 only. Hence, there is a shortfall of Rs 2,000 which will be borne by Babita.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. For the year ending 31st March, 2017 Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Profit transferred to:}& & \text{Profit \& Loss A/c}& 60,000\\ \text{Aman's Capital A/c}(60,000\times \frac{2}{5})& 24,000& & \\ \text{Babita's Capital A/c}(60,000\times \frac{2}{5})& 24,000& & \\ \text{Suresh's Capital A/c}(60,000\times \frac{1}{5})& 12,000& & \\ & \underset{–}{\overline{60,000}}& & \underset{–}{\overline{60,000}}\end{array}$

Note : Suresh's share is more than the guaranteed amount, hence there is no need for any adjustment.