Are you confused about why the profit and loss appropriation account is prepared in partnership? I have explained everything about the Profit and loss appropriation account ranging from its format, features, definition, and reasons to prepare it as per the syllabus of the Class 12 Accountancy CBSE Board.
Why Profit and Loss Appropriation Account is prepared in partnership Firm.
You have so far studies proprietorship in 11th class. In proprietorship there is only a single owner of the business. So no need to distribute profit of the firm.
But in Partnership there are at least two owner. So in order to distribute profit among partner profit and loss appropriation account is prepared.
In this account, profit is distributed among partners as interest on capital, salary and commission and remaining profit is divided in profit sharing ratio between partners.
Following transactions between firm and partners are termed as appropriation.
- Interest on Capital
- Interest on Drawings
- Salary to partners
- Commission to partners
- Allocation of Reserves
- division of distributable profits
Format of Profit and Loss Appropriation Account Class 12 Accountancy
Note:- Capital account is used if firm practice Fluctuating Capital Method. Current Account is used if firm maintain its account on Fixed Capital Method.
Features of Profit and Loss Appropriation Account
Following are the features of profit and loss appropriation account.
- It is prepared just after the profit and loss account. Thus it is an extension of the profit and loss account.
- It is prepared only by partnership firm.
- It is a nominal Account.
- It shows the appropriation of the net profit and loss for the accounting period among partners.
- Entries in this account are made giving effect to the Partnership Deed and/or the Indian Partnership Act, 1932.
Items that are not considered as appropriation
There are few items that are concerned with partners but are not recorded in profit and loss appropration account rather are considered as charge against profit.
Such items are recorded as expenses in profit and loss account and charge even if the firm incur losses.
Such items are:-
- Interest on loan of partners
- Rent to partners on their property.
- Manager’s commissions.
In This case following would be the format of Profit and Loss Appropriation Account.