Profit and Loss Appropriation Account

Distribution of Profit Among Partners

The profits and losses of a firm are distributed among the partners in the agreed profit-sharing ratio. However, if the partnership deed is silent, the profits and losses of the firm must be shared equally among all partners.
In the case of a sole proprietorship, the profit or loss, ascertained from the Profit and Loss Account, is transferred directly to the proprietor’s capital account.
In a partnership firm, certain adjustments such as interest on drawings, interest on capital, salary to partners, and commission to partners are required to be made before distributing the final profit.
For this purpose, it is customary to prepare a Profit and Loss Appropriation Account, through which the final profit or loss is ascertained and distributed among partners according to their profit-sharing ratio.

The Profit and Loss Appropriation Account is an extension of the firm’s Profit and Loss Account. All partner-related adjustments such as partner salaries, partner commissions, interest on capital, and interest on drawings are recorded in this account.

It begins with the Net Profit or Net Loss transferred from the Profit and Loss Account. After making all necessary appropriations, the final distributable profit or loss is transferred to the partners’ capital or current accounts in their profit-sharing ratio.

Profit and Loss Appropriation Account

Dr. Particulars	Amount (Rs.)	Cr. Particulars	Amount (Rs.)
Profit and Loss (if there is loss)	XXX	Profit and Loss (if there is profit)	XXX
Interest on Capital	XXX	Interest on Drawings	XXX
Salary to Partner	XXX	Partners’ Capital (distribution of loss)	XXX
Commission to Partner	XXX
Interest on Partner’s Loan	XXX
Partners’ Capital A/c (distribution of profit)	XXX
Total	XXXX	Total	XXXX

A, B and C set up a partnership firm on April 1, 2025. They contributed Rs. 50,000, Rs. 40,000 and Rs. 30,000 respectively as their capitals and agreed to share profits and losses in the ratio of 3 : 2 : 1. A is to be paid a salary of Rs. 1,000 per month and B, a Commission of Rs. 5,000. It is also provided that interest to be allowed on capital at 6% p.a. The drawings for the year were A Rs. 6,000, B Rs. 4,000 and C Rs. 2,000. Interest on drawings of Rs. 270 was charged on A drawings, Rs. 180 on B drawings and Rs. 90 on C drawings. The net profit as per Profit and Loss Account for the year ending March 31, 2025 was Rs. 35,660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.

Profit & Loss Appropriation Account for the year ended 31 March 2025

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To A Salary (1,000 × 12)	12,000	By Net Profit as per P&L A/c	35,660
To B Commission	5,000	By Interest on Drawing: · A = 270 · B = 180 · C = 90	540
To Interest on Capital: · A (50,000 × 6%) =3,000 · B (40,000 × 6%) = 2,400 · C (30,000 × 6%) = 1,800	7,200
Share of profit transferred to Capital Accounts: · A = 6000 · B = 4000 · C = 2000	12,000
	36,200		36,200

A and B are partners sharing profits in the ratio of 3:2, with capitals of Rs. 50,000 and Rs. 30,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of Rs. 2,500. Manager is to be allowed commission Rs. 5,000. A has also given a Loan on April 01, 2025 of Rs. 50,000 to the firm without any agreement. During the year 2025–26, the profits earned are Rs. 22,250.

Prepare Profit and Loss Appropriation account showing the distribution of profit and the partners’ capital accounts for the year ending March 31, 2025.

Profit and Loss Account

Particulars	Amounts	Particulars	Amounts
To Managers’ commission	5,000	By Profit	22,250
To Interest on A’s Loan	3,000

Profit and Loss Appropriation Account

Particulars	Amounts	Particulars	Amounts
To B’s salary	2,500	By Profit and Loss, A/c (Net profit before B’s salary)	14,250
To Interest on capital: · A’s = 3,000 · B’s = 1,800	4,800
To Profit transferred to partner’s capital account: · A’s = 4,170 · B’s = 2,780	6,950
	14,250		14,250

A’s Capital Account

Date 2025	Particulars	J.F.	Amount (Rs.)	Date 2025	Particulars	J.F.	Amount (Rs.)
Mar. 31	To Balance c/d		57,170	2025 Apr. 01	Balance b/d		50,000
				Mar. 31	Interest on capital		3,000
				Mar. 31	Profit & Loss Appropriation A/c (share of profit)		4,170
			57,170				57,170

B’s Capital Account

Date 2025	Particulars	J.F.	Amount (Rs.)	Date 2025	Particulars	J.F.	Amount (Rs.)
Mar. 31	To Balance c/d		34,580	2025 Apr. 01	By Balance b/d		30,000
				Mar. 31	By Interest on capital		1,800
				Mar. 31	By Profit & Loss Appropriation A/c (share of profit)		2,780
			34,580				34,580

Maintenance of Capital Accounts of Partners

Separate capital accounts are maintained for each partner. For example, if A, B, and C are three partners, each partner will have an individual capital account. These accounts can be maintained under either of the following two methods:

Fixed Capital Account Method
Fluctuating Capital Account Method

Fixed Capital Account Method

Under the fixed capital method, the capital of each partner remains constant, unless additional capital is introduced or a part of the capital is withdrawn, as agreed upon by the partners. Under this method, two accounts are maintained for each partner:

Partner’s Capital Account

This account records the amount of capital invested by a partner in the firm.
It always shows a credit balance.
The balance remains fixed year after year unless there is additional capital introduced or capital withdrawn.

Partner’s Current Account

This account is maintained to record all other transactions between the partner and the firm, excluding capital introduction and withdrawal.
Items recorded include interest on capital, interest on drawings, salary, commission, and share of profit or loss.
The balance in the current account fluctuates with each such transaction.

Presentation in Balance Sheet

The Capital Account balance of each partner appears on the liabilities side of the balance sheet under the head “Partners’ Capital Accounts”.
The Current Account balance, if positive, is also shown on the liabilities side; if negative, it is shown on the assets side as a debit balance.

Partner’s Capital Account

Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount
	Bank (permanent withdrawal of capital)		XXX		Balance b/d (opening balance)		XXX
	Balance c/d (closing balance)		XXX		Bank (fresh capital introduced)		XXX
			XXXX				XXXX

Partner Current Account

Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount
	Balance b/d (in case of debit opening balance)		XXX		Balance b/d (in case of credit opening balance)		XXX
	Drawings		XXX		Salary		XXX
	Interest on drawings		XXX		Commission		XXX
	Profit & Loss a/c		XXX		Interest on capital		XXX
	Balance c/d (in case of credit closing balance)		XXX		Profit & Loss Appropriation (share of profit)		XXX
					Balance c/d (in case of debit closing balance)		XXX
			XXXX				XXXX

Fluctuating Capital Method

Under the fluctuating capital method, only one account the Capital Account is maintained for each partner.
All adjustments such as share of profit or loss, interest on capital, drawings, interest on drawings, salary, and commission to partners are recorded directly in the partner’s capital account.
Because all partner-related transactions affect the same account, the balance in the capital account keeps changing, or fluctuating, throughout the year. This is why it is known as the fluctuating capital method.
In the absence of any specific instruction in the partnership deed, the capital account is assumed to be maintained under the fluctuating capital method.

Proforma of Partner’s Capital Account (Fluctuating Method)

Partner’s Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
Drawings	xxx	Balance b/d (Opening Capital)	xxx
Interest on Drawings	xxx	Additional Capital Introduced	xxx
Share of Loss	xxx	Interest on Capital	xxx
Salary/Commission (if drawings exceed)	xxx	Salary/Commission to Partner	xxx
Balance c/d (Closing Capital)	xxx	Share of Profit	xxx
Total	xxx	Total	xxx

Difference between Fixed vs. Fluctuating Capital Accounts

Basis of Distinction	Fixed Capital Account	Fluctuating Capital Account
Number of Accounts	Two separate accounts are maintained for each partner: Capital Account and Current Account.	Only one account the Capital Account is maintained for each partner.
Adjustments	All adjustments such as drawings, salary, interest on capital, commission, etc., are recorded in the Current Account, not in the Capital Account.	All such adjustments are recorded directly in the Capital Account.
Nature of Balance	The balance in the Capital Account remains fixed unless additional capital is introduced or capital is withdrawn.	The Capital Account balance fluctuates every year due to various adjustments.
Credit/Debit Balance	Capital Accounts always show a credit balance.	The Capital Account may show a debit or credit balance, depending on transactions.

Fintaxman

Profit and Loss Appropriation Account – Partnership Accounting

Distribution of Profit Among Partners