Transaction of the partnership firm are recorded according to the Double Entry System of accounting. For recording the transactions the procedure followed is similar to that of the Sole Proprietorship. Starting from Journal, Cash Book and other Subsidiary books viz. Purchases book, Sales book etc. Ledger and trial balance are prepared and at the end of the accounting period Profit and Loss account and Balance sheet are prepared to know about the Profitability and the financial position of the firm. Till here there is no difference between the accounts of a sole proprietor and a partnership firm. Now the question arise that how to divide the profits or losses among the partners and how to make other appropriations to them like salary, commission, Interest on capital etc.
So after making the Trading and Profit and Loss account of a Partnership firm the next step is to divide the profits or losses among the partners and to make other appropriations like interest on capital, salary, commission etc. For this purpose an another account is prepared i.e. profit and Loss appropriation account.
This account is prepared to show the division of profit and other appropriations among partners like salary, commission, interest on capital, interest on drawings etc. A specimen of this account is as under.
Profit and Loss Appropriation Account
|To Profit and Loss A/c(loss transferred from Profit & Loss A/c)
To Salaries of Partners
To Commission to Partners
To Interest on Partners’ Capitals
To Reserve A/c
To Profit transferred to Partners capital or current account
|By Profit and Loss account(Profit transferred from P & L account)
By Interest on Drawings
By Loss transeferred to Partners’ capital or current accounts
|To Interest on Capital:||By Net Profit||2,00,000|
|A-Rs. 30,000||By Interest On Drawings|
|B-Rs. 42,000||A- 400|
|C-Rs. 24,000||96,000||B- 500|
|To Salary (A)||24,000||C- 250||1,150|
|To General Reserve||8,115|
|To Commission (B)||7,303|
|To Profit transferred to:|