Shivam and Swayam are partners sharing profits in the ratio of 2:1 with capitals of ₹2,50,000 and ₹1,50,000 respectively. Interest on capital is agreed @ 5% p.a. Swayam is to be al... Shivam and Swayam are partners sharing profits in the ratio of 2:1 with capitals of ₹2,50,000 and ₹1,50,000 respectively. Interest on capital is agreed @ 5% p.a. Swayam is to be allowed an annual salary of ₹8,000. During the year 2023-24, they earned profits of ₹30,000. A provision of ₹2000 is to be made in respect of commission to the manager. Interest on drawings being; Shivam ₹2000 and Swayam ₹1000. Prepare Profit and Loss Appropriation Account.

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Understand the Problem

The question asks to prepare a Profit and Loss Appropriation Account for a partnership firm with partners Shivam and Swayam, given their profit-sharing ratio, capitals, interest on capital, Swayam's salary, profit earned, provision for manager's commission, and interest on drawings. The objective is to distribute the profits between the partners after considering all adjustments.

Answer

Profit to Shivam: $2,000$ Profit to Swayam: $1,000$
Answer for screen readers

Profit to Shivam: $2,000$ Profit to Swayam: $1,000$

Steps to Solve

  1. Calculate Interest on Capital for Shivam Interest on Shivam's capital = Capital * Interest Rate $2,50,000 * 5% = 2,50,000 * 0.05 = 12,500$

  2. Calculate Interest on Capital for Swayam Interest on Swayam's capital = Capital * Interest Rate $1,50,000 * 5% = 1,50,000 * 0.05 = 7,500$

  3. Calculate Total Interest on Capital Total Interest on Capital = Shivam's Interest + Swayam's Interest $12,500 + 7,500 = 20,000$

  4. Calculate Total Interest on Drawings Total interest on drawings = Shivam's Drawings + Swayam's Drawings $2,000 + 1,000 = 3,000$

  5. Calculate Net Profit before Appropriations Start with the profit given then subtract manager's commission. Net Profit before Appropriations = Profit Earned - Manager's Commission $30,000 - 2,000 = 28,000$

  6. Determine the total credits. To determine the total credits we sum the net profit before appropriations with the total interest on drawings, as these entries will appear on the credit side of the P&L appropriation account. Total Credits = Net Profit before Appropriations + total interest on drawings $28,000 + 3,000 = 31,000$

  7. Calculate the total debits. The total debits will include the interest on capital and Swayam's salary. Total Debits = Total interest on capital + Swayam's Salary $20,000 + 8,000 = 28,000$

  8. Calculate the Profit to be distributed Profit to be distributed = Total Credits - Total Debits $31,000 - 28,000 = 3,000$

  9. Calculate Shivam's Share of Profit Shivam's share = Profit to be distributed * (Shivam's Ratio / Total Ratio) $3,000 * (2 / 3) = 2,000$

  10. Calculate Swayam's Share of Profit Swayam's share = Profit to be distributed * (Swayam's Ratio / Total Ratio) $3,000 * (1 / 3) = 1,000$

Profit to Shivam: $2,000$ Profit to Swayam: $1,000$

More Information

The Profit and Loss Appropriation Account shows how the profit is distributed among the partners. It starts with the net profit and then adjusts for items like interest on capital, partner's salary, and interest on drawings.

Tips

  • Forgetting to deduct the manager's commission from the profit before appropriations.
  • Incorrectly calculating the interest on capital.
  • Adding the interest on drawings instead of deducting it. The interest on drawings is added to the profit figure.
  • Using the wrong profit-sharing ratio.
  • Simple arithmetic errors can lead to an incorrect final profit distribution. Double-check all calculations.

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