AccountancyPartnership fundamentals and the Profit and Loss Appropriation Account
Two or more people sharing one business must agree how profit is divided before a single rupee is earned. The accounts simply carry out that agreement.
Partnership and the partnership deed
Under the Indian Partnership Act, 1932, a partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons are partners; together they are a firm. The written agreement between them is the partnership deed. It usually states the capital of each partner, the profit sharing ratio, and whether interest on capital, interest on drawings, salary or commission is allowed.
If there is no deed, or the deed is silent
The Partnership Act then applies:
| Matter | Rule in the absence of an agreement |
|---|---|
| Sharing of profits and losses | Equally, whatever the capitals |
| Interest on capital | Not allowed |
| Interest on drawings | Not charged |
| Salary or commission to a partner | Not allowed |
| Interest on a loan given by a partner to the firm | Allowed at 6% a year |
Interest on a partner's loan is a charge against profit: it is paid even if there is a loss, and is debited to the Profit and Loss Account, not the Appropriation Account.
Profit and Loss Appropriation Account
After the net profit is found, this account shows how it is distributed among the partners. It is an extension of the Profit and Loss Account.
- Credit side: net profit, interest on drawings.
- Debit side: interest on capital, partners' salaries and commission, transfer to reserve, and finally the share of profit of each partner.
Solved example
Asha and Bela are partners sharing profits 3 : 2. Capitals on 1 April 2025: Asha ₹5,00,000, Bela ₹3,00,000. The deed provides: interest on capital at 6% a year; salary to Bela ₹5,000 a month; interest on drawings at 5% a year. Drawings during the year: Asha ₹60,000, Bela ₹40,000; interest on drawings works out to ₹1,500 and ₹1,000. Net profit for the year ended 31 March 2026, before these items, was ₹2,43,500.
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Interest on capital: Asha | 30,000 | By Profit and Loss A/c (net profit) | 2,43,500 | ||
| To Interest on capital: Bela | 18,000 | By Interest on drawings: Asha | 1,500 | ||
| To Salary: Bela (5,000 × 12) | 60,000 | By Interest on drawings: Bela | 1,000 | ||
| To Profit: Asha (3/5) | 82,800 | ||||
| To Profit: Bela (2/5) | 55,200 | ||||
| 2,46,000 | 2,46,000 |
Profit left for division = ₹2,43,500 + ₹2,500 − ₹48,000 − ₹60,000 = ₹1,38,000, shared 3 : 2 as ₹82,800 and ₹55,200.
Capital accounts: fluctuating and fixed
Fluctuating capital. One account for each partner. Everything goes through it, so its balance changes every year.
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Drawings | 60,000 | By Balance b/d | 5,00,000 | ||
| To Interest on drawings | 1,500 | By Interest on capital | 30,000 | ||
| To Balance c/d | 5,51,300 | By P&L Appropriation (profit) | 82,800 | ||
| 6,12,800 | 6,12,800 |
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Drawings | 40,000 | By Balance b/d | 3,00,000 | ||
| To Interest on drawings | 1,000 | By Interest on capital | 18,000 | ||
| To Balance c/d | 3,92,200 | By Salary | 60,000 | ||
| By P&L Appropriation (profit) | 55,200 | ||||
| 4,33,200 | 4,33,200 |
Fixed capital. Two accounts for each partner. The Capital Account stays at the original figure (it changes only when capital is added or withdrawn). All other items go through a Current Account.
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Drawings | 60,000 | By Interest on capital | 30,000 | ||
| To Interest on drawings | 1,500 | By P&L Appropriation (profit) | 82,800 | ||
| To Balance c/d | 51,300 | ||||
| 1,12,800 | 1,12,800 |
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Drawings | 40,000 | By Interest on capital | 18,000 | ||
| To Interest on drawings | 1,000 | By Salary | 60,000 | ||
| To Balance c/d | 92,200 | By P&L Appropriation (profit) | 55,200 | ||
| 1,33,200 | 1,33,200 |
Under the fixed method the balance sheet shows capitals of ₹5,00,000 and ₹3,00,000 and current account balances of ₹51,300 and ₹92,200. A current account can show a debit balance; a fixed capital account cannot.
Interest on capital: points to note
- It is calculated on the opening capital, with separate calculation for capital added or withdrawn during the year, for the months it was in use.
- If opening capital is not given, work back: Opening capital = Closing capital + Drawings − Share of profit − Additional capital.
- It is an appropriation, so it is allowed only out of profit. If the firm makes a loss, no interest is allowed. If profit is less than the total interest, the profit is divided in the ratio of the interest due to each partner.
Interest on drawings
Interest is charged for the period the money was out of the firm. When equal amounts are drawn at regular intervals, use the average period:
| Fixed amount withdrawn every month | Average period | ₹5,000 a month (₹60,000) at 12% a year |
|---|---|---|
| At the beginning of each month | 6.5 months | 60,000 × 12% × 6.5/12 = ₹3,900 |
| In the middle of each month | 6 months | 60,000 × 12% × 6/12 = ₹3,600 |
| At the end of each month | 5.5 months | 60,000 × 12% × 5.5/12 = ₹3,300 |
For quarterly drawings the average periods are 7.5 months (beginning of each quarter) and 4.5 months (end of each quarter). When the dates are not given, interest is charged for six months on the total. When amounts and dates are irregular, use the product method: multiply each amount by the months it was outstanding, add the products, and charge one month's interest on the total.
Guarantee of profit
A partner may be guaranteed a minimum share of profit. If his actual share falls short, the shortfall is borne by the other partners in their profit sharing ratio, or by the partner who gave the guarantee. Example: Chitra is guaranteed ₹50,000. Her share works out to ₹42,000. The deficiency of ₹8,000 is taken from the other partners' shares and added to hers.
Past adjustments
If, after the accounts are closed, it is found that interest on capital or some other item was left out or wrongly given, the books are not reopened. A single adjustment entry between the partners' capital (or current) accounts corrects it. Work out for each partner what should have been credited and what was actually credited; the net difference is debited to one partner and credited to another.
Next: how a firm values its reputation, in goodwill.
Questions students ask
In what ratio are profits shared if there is no partnership deed?
Equally among all partners, whatever their capital contributions, under the Indian Partnership Act, 1932.
Is interest on capital allowed when there is a loss?
No. Interest on capital is an appropriation of profit, so it is allowed only when there is a profit, unless the deed treats it as a charge.
What is the difference between fixed and fluctuating capital accounts?
Under the fixed method the capital account stays unchanged and all adjustments go to a separate current account. Under the fluctuating method one capital account records everything and its balance changes each year.
More Class 12 topics
For study, and independent. These pages explain accountancy as it is generally taught in Class 11, Class 12 and B.Com courses in India, in our own words with our own examples, reviewed in November 2026. This site is not connected with NCERT, CBSE, ICAI or any board or university. Syllabuses change: follow your own board's or university's current syllabus and textbook. Nothing here is professional accounting, tax or legal advice.