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Madhu, Priya, and Anargh are partners in a firm. Their capital as on 1st January 2021 were Rs 40000, Rs 20000, and Rs 20000 respectively. Anargh is to be paid a salary of Rs.2000 per month and partners are entitled to 10% annual interest on the capital. The profit will be divided in capital ratio. The profit of the year 2021 was Rs 64000. Prepare the profit and loss appropriation account.

Answer :

To prepare the Profit and Loss Appropriation Account for the year 2021, we need to consider several components related to the partnership of Madhu, Priya, and Anargh.

Step 1: Calculate Interest on Capital

  1. Madhu: 10% of Rs 40,000 = [tex]\frac{10}{100} \times 40,000 = \text{Rs 4,000}[/tex]
  2. Priya: 10% of Rs 20,000 = [tex]\frac{10}{100} \times 20,000 = \text{Rs 2,000}[/tex]
  3. Anargh: 10% of Rs 20,000 = [tex]\frac{10}{100} \times 20,000 = \text{Rs 2,000}[/tex]

Total Interest on Capital = 4,000 + 2,000 + 2,000 = Rs 8,000

Step 2: Calculate Anargh's Salary

The monthly salary of Anargh is Rs 2,000. Therefore, for the year:

[tex]\text{Anargh's Total Salary} = 2,000 \times 12 = \text{Rs 24,000}[/tex]

Step 3: Prepare Profit and Loss Appropriation Account

Profit for the Year: Rs 64,000

Debit Side (Appropriations)

  • Interest on Capital: Rs 8,000
  • Anargh's Salary: Rs 24,000

Total Appropriations = Rs 8,000 + Rs 24,000 = Rs 32,000

Credit Side

  • Net Profit: Rs 64,000

Balance Remaining for Distribution = 64,000 - 32,000 = Rs 32,000

Step 4: Distribute Remaining Profit in Capital Ratio

The capital ratio is based on initial capital contributions:

  • Madhu: Rs 40,000
  • Priya: Rs 20,000
  • Anargh: Rs 20,000

The capital ratio is 2:1:1.

Distribute Rs 32,000 in the ratio 2:1:1:

  1. Madhu's Share: [tex]\frac{2}{4} \times 32,000 = \text{Rs 16,000}[/tex]
  2. Priya's Share: [tex]\frac{1}{4} \times 32,000 = \text{Rs 8,000}[/tex]
  3. Anargh's Share: [tex]\frac{1}{4} \times 32,000 = \text{Rs 8,000}[/tex]

Conclusion

The final Profit and Loss Appropriation Account for the firm is as follows:

Debit

  • Interest on Capital: Rs 8,000
  • Anargh's Salary: Rs 24,000

Credit

  • Net Profit: Rs 64,000

Distribution of Rs 32,000 Remaining Profit:

  • Madhu: Rs 16,000
  • Priya: Rs 8,000
  • Anargh: Rs 8,000

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