Difference between Charge against Profit and Appropriation of Profit
Are you confused and looking for the difference between charge against profit and Appropriation as per the syllabus of partnership chapter class 12 CBSE Board?
See, this distinction would help you a lot. because there certain items that has to be recognized as charge against profit not aappropriation.
Meaning of charge against profit
In Accounting terms, charge against profit refers to the expenses that have to be paid irrespective of profit and loss of the firm. In other words even if a firm incurs a loss such expenses have to be paid.
For example:-
- Salary to employees
- advertisement expenses
- Administrative expenses
- factory expenses
All expenses with outside world, have to be met, whether there is a profit or loss.
Where Charge against profit are recorded
Charge against profit are recorded debit side of Profit and loss Account
Charge against profit items related to Partners as per Class 12 Commerce
There are certain items that are related to partners but are considered as charge against profit.
The Items are:-
- Interest on loan of partner to the firm
- Rent to partner
Is Managers commission is a charge against profit
Yes, managers commission is also a charge against profit and recorded in debit side of profit and loss account.
Note:- All charge against profit expenses have to recorded whether paid or not before appropriation (distribution) of profit among partners.
Meaning of Appropriation in partnership chapter class 12
In Accounting language, appropriation means distribution of profit or loss among the partners once all charge against profit are recorded in book of accounts.
In order to appropriate profit or loss among partners a special account profit and loss appropriation account is prepared. In this account remaining profit is appropriate among partners in different heads. such as
- Interest on Capital
- partners salary
- Partners commission
- Interest on drawings (it is charge from partners thus income to firm)
After appropriating the above item remaining profit is called the distributable profit and appropriate among partners in their profit sharing ratio.
Distinction between charge against profit and appropriation of profit
| S.N | Basis | Charge Against Profit | Appropriation out of profit |
| 1. | Nature | It is an expense deducted out of revenue to determine net profit or loss for the year. | It refers to distribution of net profit of the year among partners under different heads as per the partnership Deed. |
| 2. | Recording | It is debited to profit and loss account | It is debited to profit and loss appropriation account. |
| 3. | Priority | It is allowed before appropriation of profit. | It is appropriated after accounting all charges |
| 4. | Examples | managers commission, the salary of employees, rent to partners, etc | Interest on capital, Salary to partners, General Reserve, etc. |
| 5. | Necessary or not | It is necessary to make charges against profits even if there is a loss. | Appropriations are made only when there is profit. |
Q. Is Manager’s commission is a charge against profit?
Ans:- Yes, It is and recorded in debit side of profit an loss appropriation account.
Q. How loan by firm to partner is treated?
Ans:- It is treated as income to firm and recorded in credit side of profit and loss account.
Q. Is Rent paid to partner is charge against profit or appropriation?
Ans:- It is charge against profit and recorded in debit side of profit and loss account.
Q. How interest on loan by firm to partner is treated in partnership?
Ans:- It is the income to firm and credited to profit and loss Account.
MCQS for Practice
In a partnership firm, interest on a partner’s loan is treated as:
a) An appropriation of profit
b) A charge against profit
c) A capital expenditure
d) A drawing
Answer: b)
Interest on capital is considered as:
a) A charge against profit
b) An appropriation of profit
c) A revenue reserve
d) A liability
Answer: b)
Which of the following is deducted before arriving at net profit?
a) Interest on drawings
b) Partner’s salary
c) Interest on partner’s loan
d) Commission to partners
Answer: c)
If a firm incurs a loss, then partners are still entitled to receive:
a) Interest on capital
b) Partner’s commission
c) Interest on loan
d) Salary
Answer: c)
Appropriation of profit is made:
a) Before the calculation of net profit
b) After the calculation of net profit
c) During the preparation of trial balance
d) Before preparing the trading account
Answer: b)
Profit and Loss Appropriation Account is prepared to show:
a) Gross profit or loss
b) Net profit or loss
c) Distribution of profit among partners
d) Cash position of the firm
Answer: c)
Which of the following is not an appropriation of profit?
a) Salary to partners
b) Interest on capital
c) Transfer to reserve
d) Interest on partner’s loan
Answer: d)
When interest on partners’ loan is due but not paid, it is shown in the Balance Sheet as:
a) An asset
b) A liability
c) A reserve
d) Part of partners’ capital
Answer: b)
In the absence of an agreement, the rate of interest on a partner’s loan is:
a) 10% per annum
b) 6% per annum
c) 8% per annum
d) No interest is allowed
Answer: b)
Profit and Loss Appropriation Account is a part of:
a) Balance Sheet
b) Trading Account
c) Final Accounts of the firm
d) Journal Entries
Answer: c)
10 More
A firm earned a net profit of ₹80,000 after charging interest on a partner’s loan of ₹10,000. Partners decided to allow interest on capital at 10% on capitals amounting to ₹50,000 each. The amount of profit available for distribution is:
a) ₹70,000
b) ₹60,000
c) ₹80,000
d) ₹90,000
Answer: a)
If a partnership firm fails to make adequate profit, which of the following will not be affected?
a) Partner’s salary
b) Partner’s commission
c) Interest on capital
d) Interest on loan
Answer: d)
Interest on partners’ loan is transferred to:
a) Profit and Loss Account (Debit side)
b) Profit and Loss Appropriation Account (Debit side)
c) Profit and Loss Appropriation Account (Credit side)
d) Balance Sheet (Liability side) only
Answer: a)
A firm’s net profit before appropriation is ₹1,00,000. There are three partners A, B, and C. Interest on capitals and salaries total ₹1,20,000. How will the shortfall of ₹20,000 be treated?
a) Carried forward to next year
b) Ignored
c) Shared by partners in their profit ratio
d) Deducted from capitals
Answer: c)
The key distinction between charge and appropriation of profit lies in:
a) The stage of recording in accounts
b) The consistency of profit earned
c) The legal framework of partnership
d) The owner’s equity position
Answer: a)
Assertion (A): Interest on partner’s capital is appropriation of profit.
Reason (R): It must be paid even when the firm incurs a loss.
a) Both A and R are true, and R is the correct explanation of A
b) Both A and R are true, but R is not the correct explanation of A
c) A is true, but R is false
d) A is false, but R is true
Answer: c)
Assertion (A): Profit and Loss Appropriation Account records only those items that are related to the distribution of profit.
Reason (R): Interest on partner’s loan is recorded in the Profit and Loss Appropriation Account.
a) Both A and R are true, and R is the correct explanation of A
b) Both A and R are true, but R is not the correct explanation of A
c) A is true, but R is false
d) A is false, but R is true
Answer: c)
Assertion (A): A partner’s loan carries a fixed rate of interest by law in the absence of an agreement.
Reason (R): Section 13(c) of the Indian Partnership Act, 1932 prescribes a 6% annual interest rate.
a) Both A and R are true, and R is the correct explanation of A
b) Both A and R are true, but R is not the correct explanation of A
c) A is true, but R is false
d) A is false, but R is true
Answer: a)
Assertion (A): Partner’s drawings are always shown in the Profit and Loss Appropriation Account.
Reason (R): Drawings represent appropriation of profit.
a) Both A and R are true, and R is the correct explanation of A
b) Both A and R are true, but R is not the correct explanation of A
c) A is true, but R is false
d) A is false, but R is true
Answer: a)
Assertion (A): Interest on capital is calculated on the amount of capital employed during the year.
Reason (R): Any additional capital introduced during the year qualifies for interest from the date of introduction.
a) Both A and R are true, and R is the correct explanation of A
b) Both A and R are true, but R is not the correct explanation of A
c) A is true, but R is false
d) A is false, but R is true
Answer: a)
