Profit Distribution

Transferring an amount from earned profit to a reserve is an appropriation of profit, not an expense incurred to earn that profit. The firm first determines net profit in the Profit and Loss Account. After that, the partners may decide, under the deed, to retain part of the available profit in a reserve; the entry reduces the amount available for distribution but does not calculate operating profit. Therefore, option B is correct and is normally shown in the Profit and Loss Appropriation Account. Drawings are withdrawals by partners, loan repayment settles a liability, and a business expense belongs before net profit is determined.

The governing concept is the treatment of interest on drawings as an income or credit item for the firm. Drawings represent resources taken by partners for personal use. Interest charged on those drawings is recoverable from the partners, so it increases the amount available for appropriation among them and compensates the firm for the use of its funds. In the Profit and Loss Appropriation Account, this income is therefore shown on the credit side. Option A is correct. It is not salary paid to a partner, a goodwill loss or repayment of a loan; those items have different economic meanings and entries.

A salary paid to a partner is not an ordinary operating expense like wages paid to employees. It is an appropriation of the firm’s profit made according to the partnership agreement, so it is debited to the Profit and Loss Appropriation Account. The annual amount must first be calculated: Rs 6,000 per month × 12 months = Rs 72,000. Thus, option A is correct, and Rs 72,000 is shown as the partner’s salary appropriation before the remaining profit is divided equally. The Trading Account records gross trading results, the Purchases Account records purchases, and a cash credit would represent an inflow rather than the salary appropriation.

The partnership deed establishes the order in which profit is to be appropriated. If it requires a reserve to be created before distribution, the reserve amount must first be set aside or deducted from the divisible profit. The remaining profit is then distributed among the partners according to the agreed ratio. Therefore, option A is correct. Sharing the entire profit immediately would ignore the priority specified in the deed. Drawings are withdrawals of partners and cannot be treated as sales, while interest on a partner’s loan is a separate charge that should be dealt with according to the applicable rule. The key concept is that contractual priority must be followed before final profit distribution.

A commission granted to a partner under the partnership deed is an appropriation of profit, not a cost incurred to purchase or sell goods. It is calculated after determining the relevant profit and is shown in the Profit and Loss Appropriation Account before the balance is distributed among the partners. Therefore, option A is correct. The expression “before distributing the remaining profit” indicates that the commission has priority in the appropriation process. A trading purchase relates to acquiring inventory, a capital loss concerns a capital transaction, and sales revenue is income from customers; none describes a partner’s profit-based commission. The exact numerical amount would require the stated profit, but its accounting nature is clear.

The governing concept is a guaranteed minimum profit and adjustment of the deficiency. B is entitled to receive at least Rs 15,000, but the normal profit-sharing calculation gives B only Rs 12,000. The shortfall is calculated as: guaranteed minimum − normal share = Rs 15,000 − Rs 12,000 = Rs 3,000. Because the guarantee is given by the firm, this additional Rs 3,000 must be met from the profit that would otherwise remain available for the other partners. The whole Rs 15,000 is not deducted again because Rs 12,000 is already B’s normal share. Thus the reduction is Rs 3,000, making option A correct.

The Profit and Loss Appropriation Account is prepared after the ordinary Profit and Loss Account to show how the firm’s net profit is appropriated among partners. Items such as partner salary, commission, interest on capital, interest on drawings, transfers to reserves, and the final residual profit are recorded through this account according to the partnership deed. Therefore, option A is correct because it directly describes the account’s governing purpose. A trading account records gross profit from trading activities, so option B is unrelated. A customer list is not an accounting statement, and bank reconciliation compares the cash book with the bank statement; neither option C nor option D concerns distribution of partnership profit.

A:B = 2:1 means total parts \(=2+1=3\). A gets \(\frac{2}{3}\) of the net profit. So A's share \(=\frac{2}{3}\times 60,000=40,000\). Therefore A's share of profit is \(\text{₹}40,000\).

The governing rule is that, when partners share profit equally, the total distributable profit is divided into equal parts corresponding to the number of partners. Here the net profit is Rs 75,000 and there are three partners. Calculation: each partner’s share = Rs 75,000 ÷ 3 = Rs 25,000. Thus option A is correct. Option B represents the entire profit and would be the combined amount received by all three partners, not the amount received by one partner. Option C results from an incorrect division by five, while option D would make the total distribution Rs 90,000, exceeding the available profit. No salary, interest, reserve, or other adjustment is stated.

Under partnership accounting, a salary paid or allowed to a partner is not an ordinary business expense like wages paid to an employee. It is an appropriation of the firm’s profit, provided that the partnership deed authorises it. Consequently, partner salary is debited to the Profit and Loss Appropriation Account, while the partner’s capital or current account is credited. Option A is therefore correct. The Trading Account is used to determine gross profit and does not record partner appropriations. A stock account records inventory movements, not salary allocation. A bank credit would represent a payment or reduction in bank balance, but it does not identify the proper profit-distribution account.

Interest on capital is a profit appropriation allowed to partners. Therefore it is debited in the appropriation account.

Interest on drawings is an amount recovered by the firm from partners for using firm funds for personal purposes. From the firm’s point of view, this amount is income. In the Profit and Loss Appropriation Account, income items are placed on the credit side, while items appropriating or distributing profit to partners are generally placed on the debit side.

Consequently, interest on drawings is credited to the Profit and Loss Appropriation Account, so option A is correct. It is not debited to the Trading Account because it does not arise from buying or selling goods. It is also not recorded only in the capital account; the related partner’s account is credited, while the appropriation account receives the credit for the firm’s income.

The normal sequence is to prepare the Trading Account, determine gross profit or gross loss, record indirect expenses in the Profit and Loss Account, and then arrive at net profit or net loss. Only after this net result has been transferred is the Profit and Loss Appropriation Account prepared for partner-related appropriations and residual distribution. Therefore, option A is correct. Gross profit is an intermediate result and cannot be distributed before indirect expenses and other income are considered. Sales amount is revenue, not profit, because it ignores cost of goods sold and expenses. Cash balance is a balance-sheet or cash-flow-related figure and may differ greatly from accounting profit.

Reserve is 10% of profit. Calculate: \(10\% \times 1,00,000 = 10,000\). Therefore Rs 10,000 will be deducted before distribution. Option B (Rs 90,000) reflects the remaining profit after reserve, not the amount to be deducted; option C (Rs 11,000) is an incorrect percentage. Exam tip: convert percent to decimal (10% = 0.10) and multiply to avoid calculation mistakes.

The governing treatment is that the stated partner salary is appropriated first, and only the balance is divided as residual profit. Total net profit is Rs 90,000. After deducting A’s salary of Rs 15,000, the remaining profit is Rs 75,000. Since A and B share this remainder equally, A receives Rs 75,000 ÷ 2 = Rs 37,500 as residual profit. A’s total share is therefore salary Rs 15,000 + residual profit Rs 37,500 = Rs 52,500, so option A is correct. Option C omits the salary, option D includes only salary, and option B does not follow the stated calculation.

After deducting interest on capital remaining profit is Rs 68000. Dividing equally gives Rs 34000 each.

Interest charged on drawings is treated as income of the firm and is credited to the profit & loss account or to partners' current/capital accounts. Hence it increases distributable profit. Option B is incorrect because interest on drawings is not an expense to the firm but income; option C is incorrect because it is not deducted only from capital — it is recorded as income and credited to partners' accounts; option D is wrong because this income does affect distributable profit. Exam tip: remember ‘‘interest on drawings’’ is income for the firm and thus increases profit available for distribution.

Interest on capital is an appropriation allowed to partners. Therefore it is deducted before sharing residual profit.

If the deed is silent profit and loss are shared equally. Loss is also distributed among partners like profit.

Total profit-sharing ratio \(=3+2=5\). B's share of loss is proportional to its ratio \(\frac{2}{5}\).
So B's loss \(=\frac{2}{5}\times 50,000=20,000\). Hence B's share is \(\text{Rs }20,000\).

Partner commission is paid to a partner out of the firm’s profit according to the partnership deed. It is therefore an appropriation of profit, not an expense incurred to purchase goods or conduct ordinary trading operations. In the Profit and Loss Appropriation Account, appropriations are recorded on the debit side because they reduce the amount of profit left for distribution. The partner’s account is credited with the commission allowed to that partner.

Accordingly, the correct choice is A: partner commission is debited to the Profit and Loss Appropriation Account. It should not be debited to the Trading Account, because it is not a direct cost of goods sold. Nor is it sales income or a stock item. If the commission is calculated on profit after commission, the calculation must first use the proper adjusted base, but its presentation remains an appropriation. The supplied answer is consistent.

Commission is 5% of the net profit. Calculation:
Commission = Rs 1,20,000 × (5/100) = Rs 6,000.
Why other options are wrong: Rs 12,000 would be 10% (a common doubling error) and Rs 1,14,000 is the remaining profit after subtracting the commission, not the commission itself. Exam tip: always apply percent as amount × (percent/100) to avoid confusion between commission and remaining profit.

The direct answer is option A: commission must be calculated by treating it as included in the profit figure, because the commission is charged after commission. “Profit after charging commission” means the stated or relevant profit is the amount left after deducting the commission itself. Therefore a direct multiplication of the pre-commission profit by the percentage is not appropriate. If the rate is r percent and profit before commission is P, commission is generally calculated as P × r/(100 + r), when the wording says commission is a percentage of profit after charging commission. For example, if profit before commission is Rs 11000 and the rate is 10%, commission is 11000 × 10/110 = Rs 1000; profit after commission is Rs 10000, and 10% of that is Rs 1000. Option A is correct because it warns us to include the commission in the calculation base correctly. Option B is wrong because no fact makes commission zero. Option C is wrong because the question bases it on profit, not sales. Option D is wrong because commission is an appropriation or expense/charge according to the agreement, not a partner’s drawings. Exam cue: “after charging commission” usually requires the denominator 100 + rate for a percentage calculation.

The direct answer is Option A: an expense in the Profit and Loss Account. A loan from a partner is a liability of the firm, separate from the partner’s capital. Interest on that loan is the cost of using borrowed money. Therefore it is charged as an expense before arriving at net profit. Option A is correct. Option B, appropriation of profit, is used for items such as interest on capital, partner salary and profit shares after net profit; loan interest is not such an appropriation. Option C, drawings, are withdrawals by a partner and are unrelated. Option D, reserve, is an amount set aside from profit, not an interest expense. Memory cue: interest on partner’s loan is a charge; interest on partner’s capital is normally an appropriation.

Interest on capital and interest on a partner’s loan have different accounting treatment because they arise from different relationships with the firm. Capital is the partner’s contribution to the ownership of the business. Interest allowed on that capital is generally an appropriation of profit and is dealt with after determining net profit, subject to the deed and applicable law. A partner’s loan is a separate amount lent to the firm, so interest on it is a finance expense of the firm.

Therefore, choice A is correct: interest on capital is an appropriation, while interest on a partner loan is an expense. Loan interest is normally charged in determining the firm’s net profit before the appropriation account is prepared. Capital interest is then handled in the appropriation process when permitted and when profit is available under the relevant rules. Neither item is sales income or automatically a drawing. The supplied answer is accurate.