If the partnership deed requires a part of profit to be transferred to reserve when will this entry be made?

Correct answer: In Profit and Loss Appropriation Account as an appropriation

The governing concept is the classification of a transfer to reserve. When a partnership deed directs that a portion of an already determined profit be transferred to a reserve, the transfer is not an expense incurred to earn that profit. It is an appropriation made after net profit has been ascertained, and it is shown on the debit side of the Profit and Loss Appropriation Account. Therefore option B is correct. Treating it as an expense before net profit would understate the operating result; recording it as income in Cash Account would misclassify the transaction; and showing it as sales in Trading Account would have no accounting basis. The reserve represents retained profit set aside for the firm’s stated purpose.