Fundamentals of Accounting · Partnership and LLP Accounts

Profit and Loss Appropriation Account for Partnership Firms

Updated 11 October 2026 · Fact-checked

The profit and loss appropriation account shows how a firm's net profit is divided among partners. You add interest on drawings, deduct interest on capital, salary and commission as the deed allows, then share the balance in the profit-sharing ratio. If the deed is silent, profit is shared equally.

Understand Profit and Loss Appropriation Account

The Profit and Loss Account finds the net profit of the firm. The Profit and Loss Appropriation Account comes after it. It does not record business expenses. It shows how the profit is divided among the partners.

What goes into it depends on the partnership deed. Section 13 of the Indian Partnership Act, 1932 sets the default rules, which apply only if the partners have not agreed otherwise. By default, a partner gets no salary for taking part in the business. Partners share profits equally and bear losses equally. Interest on capital, if the partners agreed to it, is payable only out of profits. A partner who advances money beyond his agreed capital is entitled to interest at 6% per annum on it. That is a loan, so you treat it as a business expense and not as an appropriation.

There are two kinds of items. Credit side (gains to the firm): net profit, interest on drawings charged to partners, and any guarantee deficiency made good by a partner. Debit side (shares given to partners): interest on capital, salary, commission, transfer to reserve, and finally the balance of profit shared in the ratio. Interest on drawings is a gain to the firm because the partner pays it. Interest on capital is a cost to the firm but it is still not an expense of running the business, so it goes in the appropriation account.

The entries are passed through the partners' capital accounts (fluctuating) or current accounts (fixed capital). Interest on capital, salary and commission are credited to the partner. Interest on drawings is debited to the partner. Your final share of profit is credited too.

Two special cases appear often. First, if profit is not enough to pay all the interest on capital, you pay only as much as the profit available and share it in the ratio of the interest due, which is the capital ratio. Second, a guarantee of profit means a partner is promised a minimum share. If his actual share is lower, the guarantor bears the shortfall.

Key rules to remember

Interest on capital: Capital × Rate ÷ 100 × Period (in years); Use the opening capital unless the question gives additions or withdrawals during the year. Allowed only if the deed provides for it, and only out of profits.
Interest on drawings (fixed amount, start of every month): Total drawings × Rate ÷ 100 × 6.5 ÷ 12; Average period is 6.5 months for a 12-month year.
Interest on drawings (fixed amount, middle of every month): Total drawings × Rate ÷ 100 × 6 ÷ 12; Average period is 6 months.
Interest on drawings (fixed amount, end of every month): Total drawings × Rate ÷ 100 × 5.5 ÷ 12; Average period is 5.5 months.
Interest on drawings (single date): Amount × Rate ÷ 100 × Months remaining to year end ÷ 12; Count months from the date of drawing to the closing date of the year.
Divisible profit: Net profit + Interest on drawings − Interest on capital − Salary − Commission − Transfer to reserve; Share this balance in the profit-sharing ratio. If the deed is silent, share equally.
Insufficient profit: Profit available shared in the ratio of interest on capital due; Interest on capital is payable only out of profits, so the amount paid cannot exceed the profit.

How to solve Profit and Loss Appropriation Account questions

Follow the same order for every question. It stops you missing items and helps you earn step marks.

1Read the partnership deed information first. Note the profit-sharing ratio, whether capitals are fixed or fluctuating, and which items are allowed.
2Write the net profit (or loss) from the Profit and Loss Account at the top of the credit side. Make any adjustment the question asks for before this step.
3Calculate interest on capital for each partner, and add interest on drawings. Show each working neatly below the account.
4Calculate salary, commission, and any transfer to reserve. Check whether commission is on profit before or after charging itself.
5Check that profit is enough. If not, limit interest on capital to the profit available and share it in the capital ratio.
6Find the balance and share it in the profit-sharing ratio. Apply any guarantee: find the shortfall and charge it to the guarantor.
7Check that total distributed equals total profit available. Then prepare the capital or current accounts if asked.

Quickest way: Total column method

When to use it: Use when there are two or three partners and several items. It saves time and avoids errors.

Draw a table with a column for each partner and one for the total.
Fill in interest on capital, salary and commission for each partner, then total them.
Enter interest on drawings as a negative for each partner.
Divisible profit = net profit − total of the credits to partners + total of interest on drawings. Split it by ratio.
Add down each partner's column to get the final credit to his account. The totals must equal the net profit plus interest on drawings.

Common mistakes in Profit and Loss Appropriation Account

Charging interest on capital or drawings when the deed says nothing about it.
Students treat interest as automatic.
Fix: Allow interest on capital, interest on drawings and salary only if the question or deed says so. Otherwise share profit equally.
Putting interest on drawings on the debit side of the appropriation account.
It looks like an expense to the partner.
Fix: It is income to the firm. It is credited to the appropriation account and debited to the partner.
Paying full interest on capital when profit is smaller.
Students ignore the rule that interest is payable only out of profits.
Fix: Limit the payment to the profit available and share it in the ratio of the interest due.
Using the wrong period for interest on drawings.
Students mix up start, middle and end of month.
Fix: Memorise 6.5, 6 and 5.5 months for monthly drawings. Use exact months when only one date is given.
Treating interest on a partner's loan as an appropriation.
It is confused with interest on capital.
Fix: A partner's loan is not capital. Charge the interest to the Profit and Loss Account, as an expense, before arriving at net profit.
Sharing the divisible profit in the capital ratio.
Students carry over the ratio used for interest on capital.
Fix: Share the balance only in the profit-sharing ratio given in the deed.

Worked examples

Example 1

A and B share profits in the ratio 3 : 2. Their capitals are ₹4,00,000 and ₹2,00,000. The deed provides for interest on capital at 10% p.a., a salary of ₹5,000 per month to A, and commission to B at 5% of net profit (as stated below). Interest on drawings is 6% p.a. A drew ₹5,000 at the start of every month. B drew ₹40,000 on 1 October. The year ends on 31 March. Net profit is ₹3,00,000. Prepare the Profit and Loss Appropriation Account and find each partner's share of the balance.

Show the solution

Interest on capital: A = 4,00,000 × 10% = ₹40,000. B = 2,00,000 × 10% = ₹20,000. Total = ₹60,000.
Salary to A = 5,000 × 12 = ₹60,000.
Commission to B = 5% × 3,00,000 = ₹15,000.
Interest on A's drawings: total drawings ₹60,000. Interest = 60,000 × 6% × 6.5 ÷ 12 = ₹1,950.
Interest on B's drawings: 40,000 × 6% × 6 ÷ 12 = ₹1,200. Total interest on drawings = ₹3,150.
Credit side: net profit ₹3,00,000 + interest on drawings ₹3,150 = ₹3,03,150.
Debit side before the balance: 60,000 + 60,000 + 15,000 = ₹1,35,000.
Divisible balance = 3,03,150 − 1,35,000 = ₹1,68,150. A's share (3/5) = ₹1,00,890. B's share (2/5) = ₹67,260. Check: 1,00,890 + 67,260 = ₹1,68,150.

Answer: Divisible profit is ₹1,68,150, shared as A ₹1,00,890 and B ₹67,260.

Example 2

X and Y share profits equally. Their capitals are ₹3,00,000 and ₹2,00,000. The deed allows interest on capital at 12% p.a. The net profit for the year is only ₹30,000. There is no other appropriation. Show how the profit is distributed.

Show the solution

Interest due: X = 3,00,000 × 12% = ₹36,000. Y = 2,00,000 × 12% = ₹24,000. Total due = ₹60,000.
Profit available is ₹30,000, which is less than ₹60,000. Interest on capital is payable only out of profits, so the firm can pay only ₹30,000.
Share ₹30,000 in the ratio of interest due, 36,000 : 24,000 = 3 : 2.
X gets 30,000 × 3/5 = ₹18,000. Y gets 30,000 × 2/5 = ₹12,000.
Nothing is left, so there is no balance to share equally.

Answer: X receives ₹18,000 and Y receives ₹12,000 as interest on capital. No balance remains to be shared.

Exam tips

Read the deed clues carefully. Words like 'if the deed is silent' mean no interest, no salary, and equal sharing.
Show every working note for interest on capital and drawings. Examiners give marks for method even if one figure is wrong.
In guarantee questions, first compute the normal share, then compare it with the guaranteed amount. The shortfall is borne by the guarantor, or by all partners in their profit-sharing ratio if the firm gave the guarantee.
Check whether the question gives net profit before or after interest, salary or commission. Use the stated base for percentage commission.
Add a quick total check at the end. Distributed profit plus interest on drawings must match the credit side.

Practice questions from Partnership and LLP Accounts

Profit and Loss Appropriation Account in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Profit and Loss Appropriation Account: frequently asked questions

What is the format of a profit and loss appropriation account?

The debit side lists interest on capital, salary, commission, transfer to reserve and each partner's share of the balance. The credit side lists net profit, interest on drawings and any deficiency made good. Both sides must total the same.

How do I calculate interest on drawings?

Multiply the amount by the rate and by the time from the date of drawing to the year end. For equal monthly drawings, the average period is 6.5 months at the start of each month, 6 in the middle, and 5.5 at the end. Use the exact months when only one date is given.

What if profit is not enough to pay interest on capital?

Interest on capital is payable only out of profits. Pay only the profit available. Share it among the partners in the ratio of the interest due to each of them, which is their capital ratio.

What is a guarantee of profit to a partner?

The partner is promised a minimum amount of profit. If his share falls below that, the shortfall is made good. If a partner gave the guarantee, he bears it. If the firm gave it, all partners bear it in their profit-sharing ratio unless the question says otherwise.