The deed requires creating a reserve before distribution of profit. What is the correct accounting treatment?

Correct answer: Debit Profit and Loss Appropriation Account

A reserve created before distributing profit is an appropriation of profit. It does not represent a trading expense and does not mean that cash must immediately be placed in a separate account. The firm first transfers the specified amount from the available profit through the Profit and Loss Appropriation Account. In journal terms, the Profit and Loss Appropriation Account is debited and the Reserve Account is credited.

Thus option A is correct. Debiting the appropriation account reduces the profit available for distribution among partners, while the credit to the reserve records the retained amount. Crediting the Trading Account, debiting Cash, or crediting Drawings would not describe the creation of a partnership reserve. The deed’s instruction must be followed before the remaining profit is divided. This treatment separates profit allocation from ordinary business operations.