Question 27 of 50intermediate🔧 ApplyNumerical5 marks

The partnership agreement between Maneesh and Girish provides that: (i) Profits will be shared equally; (ii) Maneesh will be allowed a salary of Rs. 400 p.m; (iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary; (iv) 7% p.a. interest will be allowed on partner’s fixed capital; (v) 5% p.a. interest will be charged on partner’s annual drawings; (vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000, respectively. Their annual drawings were Rs. 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2019 amounted to Rs. 40,000; Prepare firm’s Profit and Loss Appropriation Account.

Correct Answer

Profit and Loss Appropriation Account Dr. for the year ending March 31, 2019 Cr.

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
To Maneesh’s Salary A/c4,800By Profit and Loss A/c (Net Profit)40,000
To Interest on Capital A/c:By Interest on Drawings A/c:
Maneesh7,000Maneesh800
Girish5,600Girish700
To Girish’s Commission A/c3,520
To Profit transferred to:
Maneesh’s Capital A/c10,290
Girish’s Capital A/c10,290
Total41,500Total41,500

Working Notes:

  1. Interest on Capital: Maneesh = 1,00,000×7000 \times 7/100 = Rs. 7,000 Girish = 80,000×7000 \times 7/100 = Rs. 5,600

  2. Interest on Drawings: Maneesh = 16,000×5000 \times 5/100 = Rs. 800 Girish = 14,000×5000 \times 5/100 = Rs. 700

  3. Maneesh’s Salary: Rs. 400×12400 \times 12 = Rs. 4,800

  4. Girish’s Commission: Commission = 10% of Net Profit after Maneesh’s Salary = 10% × (40,000 - 4,800) = 10% × 35,200 = Rs. 3,520

  5. Division of Profit: Total Profit Available = Net Profit + Interest on Drawings = 40,000 + 1,500 = Rs. 41,500 Total Appropriations = Salary + Interest on Capital + Commission = 4,800 + 12,600 + 3,520 = Rs. 20,920 Divisible Profit = 41,500 - 20,920 = Rs. 20,580 Maneesh’s Share = 20,580×1580 \times 1/2 = Rs. 10,290 Girish’s Share = 20,580×1580 \times 1/2 = Rs. 10,290

Exercise: Numerical Questions | Q: 7 | (Page 38)
For More Understanding

Explanation

The Profit and Loss Appropriation Account is prepared to show the distribution of profit among partners. The net profit is adjusted against the appropriations like salary, interest on capital, and commission. Interest on drawings is credited to this account as it is a gain for the firm. The commission is calculated on the profit balance after deducting the salary. The resulting profit is distributed equally as per the partnership agreement.

Solution Steps

  1. Step 1: Calculate Interest on Drawings. Maneesh: 16,000×5000 \times 5% = 800; Girish: 14,000×5000 \times 5% = 700. Total = 1,500.

  2. Step 2: Calculate Interest on Capital. Maneesh: 1,00,000×7000 \times 7% = 7,000; Girish: 80,000×7000 \times 7% = 5,600. Total = 12,600.

  3. Step 3: Calculate Maneesh's Salary. 400×12400 \times 12 months = 4,800.

  4. Step 4: Calculate Girish's Commission. 10% of (Net Profit 40,000 - Salary 4,800) = 10% of 35,200 = 3,520.

  5. Step 5: Determine Divisible Profit. Credit Side Total = 40,000 (Profit) + 1,500 (Interest on Drawings) = 41,500. Debit Side Appropriations = 4,800 (Salary) + 12,600 (Interest on Capital) + 3,520 (Commission) = 20,920. Divisible Profit = 41,500 - 20,920 = 20,580.

  6. Step 6: Distribute Profit. Maneesh: 20,580×1580 \times 1/2 = 10,290. Girish: 20,580×1580 \times 1/2 = 10,290.

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