Question

Tulsi and Kabir are partners sharing profits in proportion of 3 : 2 with capitals of ₹ 8,00,000 and ₹ 6,00,000 respectively. Interest on capitals is agreed at 6% p.a. Tulsi is to be allowed a salary of ₹ 6,000 per month. For the year ended 31st March, 2024, the profits prior to calculation of interest on capital but after charging Tulsi's salary amounted to ₹ 2,28,000. Manager is to be allowed a commission of 10% of the profits.

Prepare an account showing the allocation of profits.

Answer 1

Profit and Loss Account for the year ended 31st March, 2024
Particulars	Amount (₹)	Particulars	Amount (₹)
To Manager's Commission	30,000	By Net Profit	3,00,000
To Net Profit transferred to P&L Appropriation A/c	2,70,000
Total	3,00,000	Total	3,00,000

 

Profit and Loss Appropriation Account for the year ended 31st March, 2024
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Tulsi's Salary Account		72,000	By Profit and Loss Account (Net Profit)		2,70,000
To Interest on Capital:
Tulsi's Capital A/c	48,000
Kabir's Capital A/c	36,000	84,000
To Net Profit transferred to:
Tulsi's Capital A/c		68,400
Kabir's Capital A/c		45,600
Total		2,70,000	Total		2,70,000

Working Note:

1. Reconstructing Net Profit Before Partner Salary

Since the provided profit of ₹ 2,28,000 is given after charging Tulsi's salary, we must add it back to find the actual operating net profit of the business.

Tulsi's Annual Salary: 6,000 × 12 months = 72,000

Net Profit before Tulsi's Salary: 2,28,000 + 72,000 = 3,00,000

2. Calculation of Manager's Commission

A manager's commission is a charge against profits and must be calculated on the firm's true net profit before any partner-level appropriations take place:

Manager's Commission: 10% of 3,00,000 = 30,000

Net Profit to transfer to P&L Appropriation A/c: 3,00,000 − 30,000 = 2,70,000

3. Calculation of Interest on Capital

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

Tulsi: 8,00,000 × 6% = 48,000

Kabir: 6,00,000 × 6% = 36,000

Total Interest on Capital: 48,000 + 36,000 = 84,000

4. Distribution of Divisible Profit

Divisible Profit = Net Profit after Commission − Tulsi’s Salary − Total Interest on Capital

Divisible Profit = 2,70,000 − 72,000 − 84,000 = 1,14,000

Distributed in the profit-sharing ratio of 3 : 2:

Tulsi's Share: `1,14,000 xx 3/5 = 68,400`

Kabir's Share: `1,14,000 xx 2/5 = 45,600`