Question

A, B and C were partners in a firm having capitals of ₹ 1,00,000; ₹ 1,00,000 and ₹ 2,00,000 respectively. According to the partnership deed the partners were entitled to interest on capital @ 6% p.a. A being the working partner was also entitled to a salary of ₹ 5,000 per month. The profits were to be divided as follows: The first ₹ 40,000 in the ratio of 2 : 3 : 5. Next ₹ 80,000 in the proportion of their capitals. Remaining profits to be shared equally.

The firm made a profit of ₹ 2,70,000 for the year ended 31st March, 2024 before charging any of the above items. Prepare the Profit & Loss Appropriation Account and pass the necessary journal entry for apportionment of profits.

Answer 1

Profit and Loss Appropriation Account for the year ended 31st March, 2024
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital:		24,000	By Profit and Loss A/c (Net Profit)		2,70,000
A's Capital A/c	6,000
B's Capital A/c	6,000
C's Capital A/c	12,000
To Salary to A		60,000
To Net Profit transferred to:		1,86,000
A's Capital A/c	50,000
B's Capital A/c	54,000
C's Capital A/c	82,000
Total		2,70,000	Total		2,70,000

 

Journal Entry for Apportionment of Profits
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2024
Mar 31	Profit and Loss Appropriation A/c   ...Dr.		1,86,000
	To A’s Capital A/c			50,000
	To B’s Capital A/c			54,000
	To C’s Capital A/c			82,000
	(Being the final divisible profit distributed among the partners in accordance with the multi-tier rules of the partnership deed)

Working note:

1. Calculation of Interest on Capital

Interest is allowed at 6% p.a. on the opening capital balances:

A: 1,00,000 × 6% = 6,000

B: 1,00,000 × 6% = 6,000

C: 2,00,000 × 6% = 12,000

Total Interest on Capital: 6, 000 + 6,000 + 12,000 = 24.000

2. Calculation of Working Partner's Salary

A's Annual Salary: 5,000 × 12 months = 60,000

3. Determination of Total Divisible Profit

Divisible Profit = Net Profit − Total Interest on Capital − A's Salary

Divisible Profit = 2,70, 000 − 24,000 − 60,000 = 1,86,000

4. Step-by-Step Distribution of Divisible Profit (₹ 1,86,000)

Tier 1: First ₹ 40,000 distributed in the ratio of 2 : 3 : 5

A's share: `40,000 xx 2/10 = 8,000`

B's share: `40,000 xx 3/10 = 12,000`

C's share: `40,000 xx 5/10 = 20,000`

Tier 2: Next ₹ 80,000 distributed in their Capital Proportion (1 : 1 : 2)

A's share: `80,000 xx 1/4 = 20,000`

B's share: `80,000 xx 1/4 = 20,000`

C's share: `80,000 xx 2/4 = 40,000`

Tier 3: Remaining Profit shared equally among all three partners

Remaining Profit Balance: 1, 86,000 − (40,000 + 80,000) = 66,000

A's share: `66,000 xx 1/3 = 22,000`

B's share: `66,000 xx 1/3 = 22,000`

C's share: `66,000 xx 1/3 = 22,000`

Final Profit Distribution

Categories/Tiers	Partner A (₹)	Partner B (₹)	Partner C (₹)	Total
First ₹ 40,000 (2 : 3 : 5)	8,000	12,000	20,000	40,000
Next ₹ 80,000 (1 : 1 : 2)	20,000	20,000	40,000	80,000
Remaining ₹ 66,000 (Equal)	22,000	22,000	22,000	66,000
Total Share of Profit	50,000	54,000	82,000	1,86,000