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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Distribution of Profit among Partners

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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.

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):

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

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

• For transferring interest on drawings to Profit and Loss Appropriation Account:

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

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

• 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
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.

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

Solution:

Profit and Loss Appropriation Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (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
Commission to Bob	10000
The share of profit transferred to Capital accounts :
Avi	3000
Bob	1800
Charles	1200
Total	38000	Total	38000