Profit and Loss Appropriation Account

Profit and Loss Appropriation Account

'Profit and Loss Appropriation Account' is merely an extension of the profit and loss account and is prepared to show how net profit is to be distributed among the partners. The account should begin with the profit or loss forwarded from the profit and loss account. Further this account is credited with net profit and interest on drawings, and debited with interest on capitals, salary or commission to partners. After these adjustments have been made, the Profit and Loss Appropriation Account will show the amount of profit or loss. After transferring a particular sum to the reserve fund , balance amount will be distributed among the partners in the agreed profit sharing ratio . And this amount is transferred to their capital or current accounts.

For preparing the profit and loss appropriation account, the following journal entries have to be recorded for various items:

1.         For the transfer of Net profit

            P&L account Dr

                        P&L Appropriation  a/c

            (Net profit  transferred to p&l appropriation account)

            P&L appropriation a/c Dr

                        P&L account

            (Net loss transferred to p&l appropriation account)

2. For Interest on Capital

                        Interest on Capital a/c Dr.

                                    Partners' Capital/Current a/c

(For Crediting Interest on Capital to Capital/Current Account )

                        Profit and Loss Appropriation a/c Dr.

                                    Interest on Capital a/c

(For transferring Interest on Capital to Profit and Loss Appropriation Account)

3. For Interest on Drawings

                        Partners Capital/Current a/c Dr.

                                    Interest on Drawings a/c

(Interest on Drawings is a gain to the firm and is charged to Partner's Capital/Current Account)

                        Interest on Drawings a/c Dr.

                                    Profit and Loss Appropriation a/c

(For transferring Interest on Drawings to Profit and Loss Appropriation Account, the following entry is to be recorded)

4. Partner's Salary

                        Salary to Partner a/c Dr.

                                    Partner Capital/Current a/c

(Salary allowed to a partner is a gain of the individual partner and charge against the profits of the firm as per partnership agreement. For this following entry is recorded )

                        Profit and Loss Appropriation a/c Dr.

                                    Salary to partner a/c

                        (For charging salary allowed to a partner)

5. Partner's Commission

                        Commission to partner a/c Dr.

                                    Partner's capital/current a/c

(Commission due to the partner  )

                        Profit and Loss Appropriation a/c Dr.

                                    Commission to partners a/c

(Commission paid to a partner is charged to Profit and Loss Appropriation account )

6. For Transfer to Reserve:

                        Profit and Loss Appropriation a/c Dr.

                                    Reserve

(Amount transferred to Reserve)

7. Transfer of share of Profit or Loss to P&L Appropriation

If Profit:

                        Profit and Loss Appropriation a/c Dr.

                                    Partner's Capital/Current a/c

If Loss:

                        Partner's Capital/Current a/c Dr.

                                    Profit and Loss Appropriation a/c