3 Distribution of Profits

  12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

In a sole trading concern, the net profit disclosed by the Profit and Loss Account belongs to the sole trader and is transferred to his capital account. However, in a partnership firm, the net profit as shown by the Profit and Loss Account need certain adjustments with regard to interest on capitals, interest on drawings, salary and commission to the partners. For this purpose, Profit and Loss Appropriation Account may be prepared. This is merely an extension of the Profit and Loss Account and is prepared to show how net profit has been distributed among the partners.

 

This account is credited with net profit and interest on drawings and debited with interest on capitals, salary or commission to partners. Net loss will be shown on the debit side. After these adjustments have been made, this account will show the amount of profit or loss which shall be distributed among the partners in the agreed profit sharing ratio. 

The various adjustments made in the Profit and Loss Appropriation account are explained below:

3.1 Interest on capital:

Interest on capital is allowed to partners only, if the partnership deed specifically allows it. Interest is usually calculated on the opening capital and on the capital introduced during the year. If the date of additional capital introduced during the year is not given, the interest is to be calculated for six months.

Journal Entries:

(a) To adjust interest on capital

Interest on capital A/c                         Dr.

To Partners’ Capital A/c

(In case of fluctuating capital)

or

To Partners’ Current A/c

(In case of fixed capital)

(b) To close the interest on capital account

Profit & Loss Appropriation A/c        Dr.

                                   To Interest on capital A/c

Illustration : 3

Ravi and Raghu started business on April 1, 2003 with capitals of Rs.90,000 and Rs.70,000 respectively. Ravi introduced Rs.10,000 as additional capital on July 1, 2003. Interest on capital is to be allowed @ 10%. Calculate the interest payable to Ravi and Raghu for the year ending March 31,2004.

      Solution:   

                        a)  Interest on Ravi’s capital:

      

 



Lesson to be continued - 3.2 Interest on Drawing