Profit and Loss Appropriation Account

Profits are an important part of a business so as its allocation. That is why the Profit and Loss Appropriation Account is an important part of an organization. Profit and Loss Appropriation Account is necessary for businesses, especially partnerships because they help to allocate the net of expenditures and incomes among the various partners. Now let’s discuss various facts about the Profit and Loss Appropriation A/c.

Meaning of Profit and Loss Appropriation Account

It is a special account that a firm prepares to show the distribution of profits/losses among the partners or partner’s capital.

This account should not be confused with the typical Profit and Loss Account but rather seen as an extension of it as it is made after making the Profit and Loss Account.

Purpose

Overall the firm uses it to show the allocation and distribution of Net Profit among the partners, reserves, and dividends.

Learn more about Limited Liability Partnership in detail.

Creators

A partnership form of business organizations creates such kind of special account. Moreover, the Partnership Deed plays a very important role in deciding the various rates and amounts.

Time of Creation

A firm prepares it after the preparation of profit and loss account at the end of every Financial Year, in short on 31st March every year. It is prepared just like many other ledger accounts.

Debit Items

 It’s Debit items include:

1. Net Loss transferred from P&L account,

2. Transfer of profit to Reserves,

3. Salary to Partners,

4. Interest on Capital,

5. Commission to Partners,

6. Payments designated for dividend payments.

Credit Items

It’s Credit items include:

1. Net Profit Transferred to the account from the Profit and Loss Account,

2. Money was taken out from the general reserve,

3. Drawing by the partners and the interest thereupon.

Format of Profit and Loss Appropriation Account

Profit and Loss Appropriation A/c

Date	Particulars	Amount	Date	Particulars	Amount
	To Interest On CapitalA/c			By Profit And Loss A/c (Profit transferred from P&L A/c)
	To Partner’s Salary A/c			By Interest on Drawings A/c
	To Reserves A/c
	To Partner’s Commission A/c
	To Profit transferred to Partner’s Capital/Current Account

Charge v/s Appropriation

Charge	Appropriation
Charge against profit means the deduction of any amount from the firm’s revenue to reach Net Profit or Loss.	Appropriation of Profit is the distribution of Profit
Hence, the Profit and Loss Account is prepared.	Hence, the Profit and Loss Appropriation Account is prepared.

Balance of Profit and Loss Appropriation Account

The balance of the account (Credit – Debit) is transferred as the remaining profit either to the Capital accounts or to the Current accounts of the partners in their respective pre-decided profit distribution ratio or shares.

But in the case of deficiency of profits, adjust the allocation of profits to salary, commission, etc.  keeping in view the availability of profit.

Questions on Profit and Loss Appropriation Account

1. There are 2 Partners in a firm A and B

A’s Drawings = Rs.10000 and B’s Drawings = Rs.12000

Interest on Drawings = 10% p.a.

In such of a question, the firm will show the interest on drawings  on the credit side of the Profit and Loss Appropriation Account as follows:

Profit and Loss Appropriation A/c

Date	Particulars	Amount	Date	Particulars	Amount
				By Interest on drawings A/c  (A)	1000
				By Interest on drawings A/c  (B)	1200

 

2. There are 2 Partners in a firm.

According to the firm, A will get Rs.1000 as Salary per month

Whereas B will get Rs.1200 per month as Commission

Hence, in such kind of question, the Debit side of the account will represent the items as:

Profit and Loss Appropriation A/c

Date	Particulars	Amount	Date	Particulars	Amount
	To A’s Salary A/c	12000
	To B’s Commission A/c	18000