DIGITAL LIBRARY OF GLTSBM,NEHRU NAGAR

2. According to Indian partnership Act 1932:-
“Partnership is the relation between
persons who have agreed to share the
profits of a business carried on by all or
any of them acting for all.”
What is Partnership?

3. Partnership is established by
an oral or written agreement.
It is better to have
agreement in writing to avoid
any dispute. This written
document is known as
PARTNERSHIP DEED.
It is a legal document signed
by all partners and have
clauses.
Partnership Deed

4. Contents of a partnership deed:
A partnership deed deals with the following matters:
 Name and address of the firm.
 Names and addresses of the partners.
 Nature of the business proposed by the firm.
 Amount of capital contributed by each partner.
 The profit sharing ratio among partners.
 Duration of partnership.
 Amount, which can be withdrawn by each partner.
 Amount of salary or commission payable to any partner for his
services to the firm.
 Rate of interest allowed to the partners on their capital.
 Rate of interest charged on drawings by the partners.

5. RULES APPLICABLE IN THE ABSENCE
OF PARTNERSHIP DEED
1. Profit sharing Ratio : Profits and losses would be shared equally
among partners.
2. Interest on capital : No interest on capital would be allowed to
partners. .
3.Salary or Commission: No salary or commission is to be allowed to
partners.
4. Interest on drawings: No interest on drawings would be charged
from partners.
5. Interest on Loan : If a partner has provided any Loan to the firm, he
would be paid Interest @ 6% p.a. This interest on loan is a chargeagainst
profits i.e. it is to be allowed even if there are losses to the firm.

6. Profit and Loss Appropriation Account
Profit and Loss Appropriation Account Is Thus an extension
of the profit andloss account. In case of partnership firm it is
an account showing distribution of profit among partners as
per provisions of the partnership deed.

7. Difference between P&L A/c and P&L Appropriation A/c
Profit and Loss Account Profit and Loss Appropriation
Account
 It is prepared after the preparation of
Trading A/c.
 It is prepared by all the business
concerns.
This account does not have opening and
closing balance of profit.
 It is prepared after the preparation of
Profit and Loss A/c.
 It is prepared by partnership firms
and companies.
 This account may have both opening
as well as closing balance.

8. Profit and Loss Appropriation Account
for the year ended….
Particulars Rs. Particulars Rs.
To Interest on capital
A …
B …
To Partner’s Salaries
To Partner’s Commissions
To Reserve
To Profit transferred to:
*A’s Capital A/c …
*B’s Capital A/c …
…
…
…
…
…
By Profit and Loss A/c
(net profit subject to app.)
By Interest on Drawings:
A …
B …
…
…
Dr. Cr.

9. Interest on capital
Interest on capital is allowed to a partner to
compensate for contributing capital to the firm in
excess of the profit sharing ratio.
Interest on capital is computed on the opening
balance of the partner’s capital.
If closing capital is given ,then it is c0mputed
by a formula:
opening capital =closing capital +Drawings
+loss-profit – additional capital

10. Interest on Drawings
 Interest on drawings
represent the interest
charged on drawings made
by the partners according to
the partnership deed.
 This interest is not a business
income or gain. Rather it
forms part of the
distributable income. It is
treated just opposite to
interest on capital.

11. SALARY OR COMMISSION
Salary or commission to partners
is allowed if the partnership deed
allows it to be paid.
Salary or commission to a partner
is an appropriation of profit not a
charge against the profit. In
other words it is to be allowed
only if profit is earned.

12. Journal entries
 Interest on capital:
Interest on Capital A/c Dr.
To Partner’s Capital A/c
Profit and Loss Appropriation A/c Dr.
To Interest on Capital A/c
 Interest on
Drawings:Partner’s Capital A/c Dr.
To Interest On Drawings
Interest ON drawings A/c Dr.
To profit and loss appropriation A/c

13.  Salaries:
Commission A/c Dr.
To Partner’s Capital A/c
Profit And Loss Appropriation A/c Dr.
To Commission A/c
Partner’s Salary A/c Dr.
To Partner’s Capital A/c
Profit And Loss Appropriation A/c Dr.
To Partner’s Salary A/c
 Commission:

14. Transferring part of profit to general
reserve:
profit and loss appropriation A/c dr.
to general reserves A/c
 Distribution of profit among partners:
profit and loss appropriation A/c dr.
To partner’s capital A/c

15. ExampleQuestion:
A,B and C are partners in a business with capitals
Rs. 1,00,000 , Rs. 80,000 and Rs. 60,000 respectively and sharing
profit and loss in the ratio of 3:2:1. The partnership deed provides
the followings:
 B gets a salary of Rs.1000 p.m.
 Interest on capital will be provided Rs. 10,000, 8000 and
6000 respectively.
 C gets commission of Rs.4000.
 Interest on drawings will be charged Rs.500 , 400 and 300
respectively.
 Profit transferred to general reserve Rs.3000.
The profit for the year ending 31st December, 2008 before
taking above facts is Rs.56,200.
Pass necessary journal entries and draw profit and loss
appropriation account.

16. Journal
Date Particulars L.F Dr.
{Rs.}
Cr.
{Rs.}
2008
Dec.31
(I)A
(I)B
Profit and Loss A/c ….Dr.
To P & L App. A/c
B’ s salary A/c ….Dr.
To B’s capital A/c
P & L App. A/c ….Dr.
To B’s salary A/c
56,200
12,000
12,000
56,200
12,000
12,000
Parti. Rs. Parti. Rs.
To B’s salary
a/c
12,000 By P&L a/c
(net profit)
56,200
Dr. P & L Appropriation A/c Cr.

17. Date Particulars L.F Dr. {Rs.} Cr. {Rs.}
(II)A
(II)B
(III)A
Int. on capital A/c ....Dr.
To A’s capital A/c
To B’s capital A/c
To C’s capital A/c
P & L App. A/c ….Dr.
To Int. on capital A/c
C’s commission A/c ….Dr.
To C’s capital A/c
24,000
24,000
4,000
10,000
8,000
6,000
24,000
4,000
Parti. Rs. Parti. Rs.
To int. on capital A/c:
A’s capital A/c 10,000
B’s capital A/c 8,000
C’s capital A/c 6,000 24,000
Dr. P & L Appropriation A/c Cr.

18. Date Particulars L.F Dr. {Rs.} Cr. {Rs.}
(III)B
(IV)A
Profit and loss appropriation A/c Dr.
To C’s commission A/c
A”s capital A/c Dr.
B’s capital A/c Dr.
C’s capital A/c Dr.
To Interest on drawings A/c
4,000
500
400
300
4,000
1,200
Particulars Rs. Particulars Rs.
To C’s commission A/c 4000
Dr. P&L APPROPRIATION A/c Cr.

19. Date Particulars L.F. Dr.{Rs.} Cr.{Rs.}
(IV)B
(V)
(VI)
Interest on drawings A/c Dr.
To Profit and Loss Appropriation A/c
Profit and loss appropriation A/c Dr.
To general reserve A/c
Profit and loss appropriation A/c Dr.
To A’s capital A/c
To B’s capital A/c
To C’s capital A/c
1,200
3,000
14,400
1,200
3,000
7,200
4,800
2,400
Particulars Rs. Particulars Rs.
To General Reserve A/c
To profit trans. to capital A/c:
A 3/6 7,200
B 2/6 4,800
C 1/6 2,400
3,000
14,400
By interest on drawings A/c:
A 500
B 400
C 300 1,200
Dr. P & L Appropriation A/c Cr.

20. PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ending 31st DECEMBER, 2008
Particulars Rs. Particulars Rs.
To B’s salary A/c
To interest on capital A/c :
A 10,000
B 8,000
C 6,000
To C’s commission A/c
To general reserve A/c
To profit trans. To capital A/c’s :
A 3/6 7,200
B 2/6 4,800
C 1/6 2,400
12,000
24,000
4,000
3,000
14,400
By profit and loss A/c
(net profit)
By interest on drawings A/c :
A 500
B 400
C 300
56,200
1,200
57,400 57,400
Dr. Cr.

21. EXAMPLE 2: ( Appropriations are more than available profit)
P and Q are partners sharing profits in the ratio of 3:2.P is a non- working
partner . He contributed Rs.5,00,000 as his capital. Q did not contribute any
capital. The partnership deed provides interest on capital @10% p.a. and
salary to Q as ₨. 2,500 p.m. The net profit before providing interest on
capital and salary amounts to ₨. 40,000
for the year ended 31st MARCH, 2009.
Particulars Amount Particulars Amount
To interest on P’s capital
To Q’s salary
25,000
15,000
40,000
By net profit
(as per P&L A/c)
40,000
40,000
Solution.
PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ending 31st MARCH, 2009 Cr.

22. NOTES FOR THE ABOVE SOLUTION.
 Interest on P’s capital is Rs.5,00,000x10/100 =
50,000
 Q’s salary (Rs.2,500x12) =
30,000
Total appropriation of profit
80,000
 But available net profit is Rs.40,000 which is less then the amount of
appropriation for the year i.e. , Rs. 80,000 so it should be divided
between P and Q in the ratio of their appropriation of profit i.e. ,
Rs.50,000 : 30,000 (5:3) and not in profit sharing ratio of 3:2.
 This is so as profits after complete appropriation shall only be
distributed in their profit sharing ratio (3:2) and not before as it is not
distributable profit.
Thus, Interest on P’s capital = 40,000 x 5/8 = Rs.25,000
Q’ s salary = 40,000 x 3/8 = Rs.15,000