If the partnership deed says profit will first be transferred to reserve, what type of adjustment is this?

Correct answer: Appropriation of profit

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.