P&L Appropriation Account

Why P&L App Account

The profits and losses of the firm are distributed among the partners in an agreed ratio. This ratio is agreed as per the terms given in partnership deed.However, if the partnership deed is silent, the firm’s profits and losses are to be shared equally by all the partners.

We know that in the case of sole partnership the profit or loss, as ascertained by the profit and loss account is transferred to the capital account of the proprietor.

However, In the case of Partnership, certain adjustments such as interest on drawings, interest on capital, salary to partners, and commission to partners are required to be made.

For this purpose, we need to prepare a new account to apportion the profit derived from profit and loss account.

This new Account is called Profit and Loss Appropriation Account of the firm and ascertain the final figure of profit and loss to be distributed among the partners, in their profit

sharing ratio.

How to Make P&L App Account

Profit and Loss Appropriation Account is an extension of the Profit and Loss Account of the firm. It shows how the profits are appropriated (distributed) among the partners.

 

All adjustments like

  • Partner’s salary,
  • Partner’s commission,
  • Interest on capital,
  • Interest on drawings, etc. are made through this account.

We start with the net profit/net loss as per Profit and Loss Account. Thereafter we process all adjustments in the P&L APP Account. Once that is done, any remainder profit or loss is then distributed amongst partner.

Journal Entries

P&L balance transfer to P&L App Account

 (a) Credit balance / Net profit:

 Profit and Loss A/c Dr.

To Profit and Loss Appropriation A/c

(b) Debit balance / Net loss

Profit and Loss Appropriation A/c Dr.

To Profit and Loss A/c

 

Interest on Capital:

(a) For Allowing interest on capital:

Interest on Capital A/c Dr.

To Partner’s Capital/Current A/cs (individually)

(b) For transferring interest on capital to P& L App A/C

Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c

 

Interest on Drawings:

(a) Interest on drawings

Partners Capital/Current A/c’s (individually) Dr.

To Interest on Drawings A/c

(b) For transferring interest to P&L App.A/C

Interest on Drawings A/c Dr.

To Profit and Loss Appropriation A/c

 

Partner’s Salary:

(a) Allowing Partner’s salary

Salary to Partner A/c Dr.

To Partner’s Capital/Current A/c’s (individually)

(b) For transferring partner’s salary to P&L App Account

P&L App A/C Dr.

To Salary to Partner A/c 

 

Partner’s Commission:

(a) For crediting commission

Commission to Partner A/c Dr.

To Partner’s Capital/Current A/c’s (individually)

(b) For transferring P & Loss Appr. A/C

Profit and Loss Appropriation A/c Dr.

To Commission to Partners Capital/Current A/c

 

Share of Profit or Loss after appropriations:

(a)If Profit:

Profit and Loss Appropriation A/c Dr.

To Partner’s Capital/Current A/c’s (individually)

(b) If Loss:

Partner’s Capital/Current A/c (individually)

To Profit and Loss Appropriation A/c

Note: In case firm suffers a loss, no interest on capital, salary, remuneration is to be allowed to partners. This may be allowed subject to the available amount of balance of Profit and Loss app. Account. (After posting all other adjustments, if there is nothing left in P&L App Account balance, then interest on capital and Salary to partners entry will not be posted. Or if the balance is not sufficient to pay both, we will follow the advice given in question)

 

 Lets understand this with the template: –

 

P&L App Account
Dr.Cr.
ParticularsAmountParticularsAmount
RsRs.
To Profit and Loss ( Loss )xxxBy Profit and Loss Account ( Profit )xxx
To Commission
To Salary to Partners
   —-A Capital Account / Current Accountxxx
   —-B Capital Account / Current Accountxxx
To Interest on Capital A/CBy Interest on Drawings A/C
   —-A Capital Account / Current Accountxxx   —-A Capital Account / Current Accountxxx
   —-B Capital Account / Current Accountxxx   —-B Capital Account / Current Accountxxx
To Partner’s Capital / Current A/CBy Partner’s Capital / Current A/C
   —-A Capital Account / Current Accountxxx   —-A Capital Account / Current Accountxxx
   —-B Capital Account / Current Accountxxx   —-B Capital Account / Current Accountxxx
( Distribution of Profits )( Distribution of Loss )
TotalxxxTotalxxx