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Financial Accounting · Accounting of Limited Liability Partnership

Profit Sharing, Remuneration and Interest in LLP

Updated 10 October 2026 · Fact-checked

In an LLP, the LLP agreement decides how profit is shared and whether partners get remuneration or interest on capital. Under Section 23, if the agreement is silent, the First Schedule applies. Prepare an appropriation account: charge only what the agreement allows, then split the balance in the profit ratio.

Understand Profit Sharing, Remuneration and Interest in LLP

A Limited Liability Partnership (LLP) is run on its agreement. Section 23(1) says the mutual rights and duties of the partners, and of the LLP and its partners, are governed by the LLP agreement. So every profit-sharing question starts with one check: what does the agreement say?

The agreement may fix a profit-sharing ratio, salary or remuneration to partners, interest on capital, and interest on drawings. Each of these is allowed only if the agreement provides for it. Remuneration and interest on capital are not automatic rights.

If the agreement is silent on a matter, Section 23(4) says the First Schedule to the Act decides it. The First Schedule is not reproduced in the text supplied for this page. As commonly taught, it provides equal sharing of capital and profits, no remuneration, and no interest on capital. It also provides interest on a partner's loan or advance beyond capital at 6% per annum. Confirm these defaults against your ICMAI study material before the exam.

The working is an Profit and Loss Appropriation Account. First find the net profit of the LLP. Then deduct or add the items the agreement allows, such as interest on capital, interest on drawings and partners' remuneration. The balance is shared in the profit-sharing ratio and credited to the partners' accounts.

Two points about partners' rights help in theory questions. A partner's right to share profits and receive distributions is transferable wholly or in part (Section 42(1)). Such a transfer does not by itself make the transferee a partner or give a right to take part in management (Section 42(2) and (3)). Also, a former partner or the heirs are entitled, unless the agreement says otherwise, to the capital actually contributed and a share in accumulated profits less accumulated losses, determined at the date of cessation (Section 24(5)).

Key rules to remember

Governing rule
Agreement first; if silent, First Schedule applies (Section 23(1) and 23(4))
Always read the agreement clauses in the question before you apply any default rule.
Default profit sharing (silent agreement)
Profits and losses shared equally among partners
This is the First Schedule default as commonly taught. It does not depend on capital contributed. The text supplied here does not reproduce the Schedule.
Default remuneration and interest on capital
No remuneration; no interest on capital if agreement is silent
This is the First Schedule default as commonly taught. The text supplied here does not reproduce the Schedule, so confirm it in your study material. Charge these items only when the question or agreement allows them.
Interest on capital
Interest = Capital × Rate ÷ 100 × Period (in years)
Use the capital as stated in the question, usually the opening balance, and adjust for any additions during the year.
Interest on drawings
Interest = Drawings × Rate ÷ 100 × Months ÷ 12
For equal amounts drawn at the start of each month, average period is 6.5 months. At the end of each month, 5.5 months. Mid-month, 6 months.
Divisible profit
Net profit − Interest on capital − Remuneration + Interest on drawings
This is the amount shared in the profit ratio. If it is negative, the loss is shared in the same ratio.
Partner's loan or advance (default)
Interest at 6% per annum on advance beyond capital, if agreement silent
This is the First Schedule default as commonly taught. Check your study material.

How to solve Profit Sharing, Remuneration and Interest in LLP questions

Use this order for any LLP profit appropriation question. It keeps the marks for each step visible.

  1. 1Read the agreement terms in the question and list them: ratio, remuneration, interest on capital, interest on drawings, any minimum or maximum limits.
  2. 2If a matter is not mentioned, apply the First Schedule default (equal sharing, no remuneration, no interest on capital) and say so in a note.
  3. 3Find the net profit to be appropriated. If adjustments are given, correct the profit first.
  4. 4Compute interest on capital and interest on drawings with the correct rate and time. Show the working.
  5. 5Prepare the Profit and Loss Appropriation Account: debit interest on capital and remuneration, credit interest on drawings, then show the balance as divisible profit.
  6. 6Share the divisible profit in the profit ratio, using the agreed ratio, not the capital ratio, unless the agreement says so.
  7. 7Post to the partners' current or capital accounts as the question directs, and tick any guaranteed or limit conditions.
  8. 8Cross-check: the partners' net credits, after debiting each partner with interest on drawings, add up to the net profit.

Quickest way: Single-table appropriation method

When to use it: Use this when the question has two or three partners and several items, and you must save time in the 14-mark question.

  1. Draw a table with one column per partner plus a total column.
  2. Fill the rows in order: interest on capital, remuneration, interest on drawings (negative), then share of balance.
  3. Compute the total first, find the divisible profit, then split it by the ratio.
  4. Add each partner's column to get the net credit to the partner.
  5. Check that the total of the partners' net credits, after interest on drawings, equals the net profit.

Common mistakes in Profit Sharing, Remuneration and Interest in LLP

  • Sharing profit in capital ratio when the agreement is silent.

    Students carry over a business habit that bigger investors get more.

    Fix: If the agreement is silent, apply the First Schedule default of equal sharing. Use the capital ratio only if the agreement says so.

  • Allowing interest on capital or salary when none is provided.

    Students treat these as automatic rights, as in normal accounting practice.

    Fix: Charge them only if the agreement or the question provides them. Write a note when you ignore them.

  • Charging interest on capital when profits are insufficient without checking the clause.

    Students forget that appropriations are made out of profit.

    Fix: Read the question for conditions. Follow the agreement. State your assumption clearly if it is silent.

  • Wrong period for interest on drawings.

    Students use 12 months or half the year without reading the drawing pattern.

    Fix: Identify the pattern: start, mid or end of the month. Use 6.5, 6 or 5.5 months for equal monthly drawings.

  • Treating interest on drawings as an expense to the LLP.

    Students mix up the debit and credit sides.

    Fix: Interest on drawings is income to the LLP. Credit it in the appropriation account and debit the partner.

  • Treating a transferee of profit rights as a partner.

    Students confuse the transfer of a profit share with admission as a partner.

    Fix: Under Section 42, transfer of profit rights does not by itself make the transferee a partner or give management rights.

Worked examples

Example 1

Anil and Bharat are partners in an LLP. The LLP agreement says nothing about profit sharing, remuneration or interest on capital. Their capitals are ₹6,00,000 and ₹2,00,000. Net profit for the year is ₹1,80,000. Show the profit sharing.

Show the solution
  1. The agreement is silent, so under Section 23(4) the First Schedule applies.
  2. Default: profits are shared equally. No remuneration and no interest on capital.
  3. Profit to be shared = ₹1,80,000.
  4. Anil's share = ₹1,80,000 ÷ 2 = ₹90,000.
  5. Bharat's share = ₹1,80,000 ÷ 2 = ₹90,000.
  6. Check: ₹90,000 + ₹90,000 = ₹1,80,000.

Answer: Anil ₹90,000 and Bharat ₹90,000. The capital ratio of 3:1 is ignored.

Example 2

Rohit, Sana and Tarun are partners in an LLP sharing profits 3:2:1 as per the agreement. Capitals: Rohit ₹4,00,000, Sana ₹3,00,000, Tarun ₹2,00,000. The agreement allows interest on capital at 10% per annum and remuneration of ₹60,000 per year to Tarun. Drawings are charged interest, which is ₹3,000 for Rohit, ₹2,000 for Sana and ₹1,000 for Tarun. Net profit before these items is ₹4,26,000. Prepare the appropriation account figures.

Show the solution
  1. Interest on capital: Rohit ₹4,00,000 × 10% = ₹40,000; Sana ₹3,00,000 × 10% = ₹30,000; Tarun ₹2,00,000 × 10% = ₹20,000. Total ₹90,000.
  2. Remuneration to Tarun = ₹60,000.
  3. Interest on drawings (income) = ₹3,000 + ₹2,000 + ₹1,000 = ₹6,000.
  4. Divisible profit = ₹4,26,000 − ₹90,000 − ₹60,000 + ₹6,000 = ₹2,82,000.
  5. Share in 3:2:1: Rohit ₹2,82,000 × 3/6 = ₹1,41,000; Sana ₹2,82,000 × 2/6 = ₹94,000; Tarun ₹2,82,000 × 1/6 = ₹47,000.
  6. Check: ₹1,41,000 + ₹94,000 + ₹47,000 = ₹2,82,000.
  7. Net credit to each partner, after debiting interest on drawings: Rohit ₹40,000 − ₹3,000 + ₹1,41,000 = ₹1,78,000. Sana ₹30,000 − ₹2,000 + ₹94,000 = ₹1,22,000. Tarun ₹20,000 + ₹60,000 − ₹1,000 + ₹47,000 = ₹1,26,000.
  8. Check: ₹1,78,000 + ₹1,22,000 + ₹1,26,000 = ₹4,26,000, equal to the net profit. Before debiting interest on drawings, the credits total ₹4,32,000 (₹90,000 + ₹60,000 + ₹2,82,000), which is net profit plus ₹6,000 of interest on drawings.

Answer: Divisible profit ₹2,82,000, shared Rohit ₹1,41,000, Sana ₹94,000, Tarun ₹47,000. Net amounts credited after interest on drawings: Rohit ₹1,78,000, Sana ₹1,22,000, Tarun ₹1,26,000, totalling the net profit of ₹4,26,000.

Exam tips

  • Underline every clause on ratio, remuneration and interest before you start. Marks are lost most often for ignoring a clause.
  • When the agreement is silent, write one line naming Section 23(4) and the First Schedule default. This earns the reasoning mark.
  • Show interest workings as separate notes. Step marks are given even if the final figure is off.
  • In MCQs, watch for the trap options: capital ratio instead of equal sharing, or interest on capital allowed by default.
  • Do the closing check that the partners' net credits, after interest on drawings, equal the net profit. It catches most arithmetic slips.

Practice questions from Accounting of Limited Liability Partnership

Profit Sharing, Remuneration and Interest in LLP: frequently asked questions

How is profit shared in an LLP if the agreement is silent?

Under Section 23(4), the First Schedule applies when the agreement is silent on a matter. As commonly taught, it provides for equal sharing of profits and losses. Confirm this in your study material.

Are LLP partners entitled to remuneration or interest on capital?

Only if the LLP agreement provides for them. Section 23(1) makes the agreement the main rule. If it is silent, the First Schedule applies, and as commonly taught its default is no remuneration and no interest on capital. The Schedule is not reproduced in the supplied text, so confirm these defaults in your study material.

Does transferring a profit share make someone a partner?

No. Section 42 allows a partner to transfer the right to a share of profits and distributions. The transfer does not by itself cause the partner to cease to be one, and the transferee gets no right to manage or access information.

What does a retiring partner get from an LLP?

Section 24(5) says that, unless the agreement provides otherwise, the former partner or the person entitled gets the capital contribution actually made and a share in accumulated profits less accumulated losses, as at the date of cessation.