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Accountancy > Accounting for Partnership > Distribution of Profit Among Partners
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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Distribution of Profit among Partners

Distribution of Profit among Partners: Profit & Loss Appropriation Account

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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

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

 

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Bedare Uttam
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Bedare Uttam

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

Nikhil sharma
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Nikhil sharma

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..!

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