Question

A, B and C are partners in a firm. Their profit-sharing ratio is 3 : 2 : 1. However, C is guaranteed a minimum amount of ₹ 10,000 as a share of profits every year. Any deficiency arising on that account shall be met by A. The profits for the two years ending 31st March, 2021 and 2022, were ₹ 30,000 and ₹ 90,000, respectively.

Prepare Profit and Loss Appropriation Account for the two years.

Answer 1

Dr.	Profit and Loss Appropriation Account For the year ending 31st March 2021				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Profit transferred to:		10,000	By Profit and Loss A/c		30,000
A’s Capital A/c	15,000
Less: Deficiency in C’s Share	5,000
B’s Capital A/c		10,000
C’s Capital A/c	5,000	10,000
Add: Deficiency met by A	5,000
		30,000			30,000

Working Note:

Share of Profit:

A = `30,000 xx 3/6`

=  ₹ 15,000

B = `30,000 xx 2/6`

=  ₹ 10,000

C = `30,000 xx 1/6`

= ₹ 5,000

The minimum guaranteed amount to C is ₹ 10,000, whereas his share of profit as per the profit-sharing ratio works out to be ₹ 5,000 only. Hence, there is a shortfall of ₹ 5,000 which will be borne by A.

Dr.	Profit and Loss Appropriation Account For the year ending 31st March 2022		Cr.
Particulars	₹	Particulars	₹
To Profit transferred to:		By Profit and Loss A/c	90,000
A’s Capital A/c `(90,000 xx 3/6)`	45,000
B’s Capital A/c `(90,000 xx 2/6)`	30,000
C’s Capital A/c `(90,000 xx 1/6)`	15,000
	90,000		90,000

C’s share is more than the guaranteed amount; hence, there is no need for any adjustment.