PREPARATION OF PROFIT & LOSS APPROPRIATION ACCOUNT

PREPARATION OF PROFIT & LOSS APPROPRIATION ACCOUNT

Profit and Loss Appropriation Account - Introduction

Profit and Loss Appropriation Account - Introduction

PREPARATION OF PROFIT & LOSS APPROPRIATION ACCOUNT -ILLUSTRATIONS

Illustration -1

Anil , Rahim and Vishal set up a partnership firm on January 1, 2010. They contributed Rs. 50,000, Rs. 40,000 and Rs. 30,000 respectively as their capitals and decided to share profits in the ratio of 3:2:1. The partnership deed provided that Anil is to be paid a salary of Rs. 1,000 p.m. and Rahim a commission of Rs. 5,000. It also provided that interest on capital be allowed @ 6% p.a. The drawings for the year were: Anil Rs. 6,000, Rahim Rs. 4,000 and Vishal Rs. 2,000. Interest on drawings Rs. 270 on Anil’s drawings, Rs. 180 on Rahim's drawings and Rs. 90 on Vishal's drawings. The net amount of profit as per the profit and loss account for the year ended 2010 was Rs. 35,660. You are required to record the necessary journal entries relating to appropriation of profit and prepare the profit and loss appropriation account and the partners' capital accounts.

Journal Entry in the Books of Anil , Rahim and Vishal

Date	Particular	L.F	Debit Amount (Rs.)	Credit Amount (Rs.)
	Profit and Loss a/c                              Dr.            Profit and Loss Appropriation a/c (Transfer of Profit to Profit and Loss Appropriation Account)		35,660 12,000 12,000 5,000 5,000 7,200 7,200 270 180 90 540 12,000	35,600 12,000 12,000 5,000 5,000 3,000 2,400 1,800 7,200 540 540 6,000 4,000 2,000
	Anil's Salary a/c                                     Dr.           Anil's Capital a/c (Amount of Anil's Salary)
	Profit and Loss Appropriation a/c       Dr.           Anil's Salary a/c (Transfer of Anil's Salary to Profit and Loss Appropriation Account)
	Rahim’s Commission a/c                       Dr.                                                          Rahim’s Capital a/c (Amount of  Rahim’s Commission)
	Profit and Loss Appropriation a/c        Dr.           Rahim’s Commission a/c (Transfer of Rahim’s Commission to Profit and Loss Appropriation Account)
	Interest on Capital a/c                            Dr.          Anil's Capital a/c          Rahim’s Capital a/c          Vishal's Capital a/c (Amount of interest on capital)
	Profit and Loss Appropriation a/c        Dr.           Interest on Capital a/c (Transfer of Interest on Capital to Profit and Loss Appropriation Account)
	Anil's Capital a/c                                    Dr. Rahim's Capital a/c Vishal's Capital a/c           Interest on Drawings a/c (Amount of interest on drawings)
	Interest On Drawings a/c                       Dr.          Profit and Loss Appropriation a/c (Transfer of Interest on drawings to Profit and Loss Appropriation Account)
	Profit and Loss Appropriation a/c         Dr.           Anil's Capital a/c           Rahim's Capital a/c           Vishal's Capital a/c (Amount of profit on appropriation)

Profit and Loss Appropriation Account

Dr                              for the year ended December 31,2010                              Cr

Particulars	Amount	Particulars	Amount
To Anil's Salary To Rahim’s Commission                                 To  Interest on capital Anil's Capital                            3,000 Rahim's Capital                        2,400 Vishal's Capital                         1,800                  To Profit transferred to     Capital accounts                   Anil              6,000                  Rahim           4,000                   Vishal             2,000	12000 5000 7200 12000	By Net profit as per      Profit and loss a/c By interest on drawings Anil's Capital                270 Rahim's capital             180 Vishal’s Capital              90	35,660 540
	36,200		36,200

Partner’s Capital Account

Dr                                                                                                                   Cr

Date	Particulars	Anil	Rahim	Vishal	Date	Particulars	Anil	Rahim	Vishal
	To Drawings To Interest on Drawings To Balance c/d	6000 270 64730	4000 180 47220	2000 90 31710		By Balance b/d By Interest on capital By Salary By Commission By P&L Appropriation a/c (Profit)	50000 3000 12000 ------ 6000	40000 2400 ------ 5000 4000	30000 1800 ------- ------- 2000
		71000	51400	33800			71000	51400	33800

Illustrations – 2

Reghu and Ramu are partners in a firm sharing profits in the ratio of 3:2. The balance in their capital and current accounts as on January1, 2000 were as under :

                                                        

Items	Reghu (Rs.)	Ramu (Rs.)
Capital Account	30000	20000
Current Account (Credit)	10000	8000

The partnership deed provided that Reghu is to be paid salary @ Rs. 500 p.m. whereas Ramu is to get commission of Rs. 4,000 for the year. Interest on capital is to be allowed @ 6% p.a. The drawings of Reghu and Ramu for the year were Rs. 3,000 and Rs. 1,000, respectively. Interest on drawings for Reghu and Ramu works out at Rs. 75 and Rs. 25, respectively. The net profit of the firm before making these adjustments was Rs. 24,900.Prepare the Profit and Loss Appropriation Account and the partners' capital and current accounts.

Profit and Loss Appropriation Account for the year ended Dec. 31,2000

Dr.                                                                                                  Cr.

Particulars	Amount	Particulars	Amount
To Reghu's Salary To Ramu’s Commission                                 To  Interest on capital Reghu's Capital                         1800 Ramu's Capital                          1200 To Profit transferred to     Capital accounts                   Reghu              7200                  Ramu               4,800	6000 4000 3000 12000	By Net profit as per      Profit and loss a/c By interest on drawings Reghu's Capital               75 Ramu's capital                25	24900 100
	25000		25000

When Capitals are Fixed

Partner’s Capital Account

Dr                                                                                                                   Cr

Date	Particulars	Sajeev	Rajeev	Date	Particulars	Sajeev	Rajeev
	To Balance c/d	30000	20000		By Balance b/d	30000	20000
		30000	20000			30000	20000

Partner’s Current Account

Dr                                                                                                                   Cr

Date	Particulars	Sajeev	Rajeev	Date	Particulars	Sajeev	Rajeev
	To Drawings To Interest on Drawings To Balance c/d	3000 75 21925	1000 25 16975		By balance b/d By Interest on capital By Salary By commission By P&L Appropriation a/c (Profit)	10000 1800 6000 7200	8000 1200 4000 4800
		25000	18000			25000	18000

When capital Fluctuates

Partner’s Capital Account

Dr                                                                                                                   Cr

Date	Particulars	Sajeev	Rajeev	Date	Particulars	Sajeev	Rajeev
	To Drawings To Interest on Drawings To Balance c/d	3000 75 41925	1000 25 28975		By balance b/d By Interest on capital By Salary By commission By P&L Appropriation a/c (Profit)	30000 1800 6000 7200	20000 1200 4000 4800
		45000	30000			45000	30000