If interest on capital is wrongly treated as expense in Profit and Loss Account what problem occurs in profit distribution?

Correct answer: Net profit will be lower and appropriation will be wrong

Interest on capital is normally a distribution or appropriation of profit in partnership accounts, provided the partnership agreement allows it. It is not treated as an operating expense while preparing the ordinary Profit and Loss Account. It is recorded later in the Profit and Loss Appropriation Account and charged against the profit available for distribution.

If it is wrongly debited as an expense in the Profit and Loss Account, the reported net profit becomes lower before the appropriation stage. If it is then also dealt with in the appropriation account, the error may cause double reduction; even without that, the classification and distribution are wrong. The profit-sharing ratio itself does not change, and interest on drawings does not disappear. Therefore, option A best states the problem.