Preparation of Profit and Loss and Loss Appropriation Account

Profit & Loss Appropriation account is mere an extension of Profit Loss account. It is prepared to ascertain the net distributable profit to be credited among the partners in a partnership firm. All the entries related to interest on partners’ capital, interest on partners’ drawings, partners’ salaries or commission, amount transferred to reserve fund etc. should be recorded in this account.

Format:

Dr.                                     Profit & Loss Appropriation A/c                                             Cr.

Date	Particulars	Amount	Date	Particulars	Amount
	To tfd. to Reserve To Partners’ Capital A/c       (Interest on capital) To Partners’ Capital A/c       (Salary/ Commission) To Profit tfd. to Capital       A/c of :       Partner A            xxxx       Partner B            xxxxx	xxxxx xxxxx xxxxx xxxxx		By Net Profit as per       Profit & Loss A/c By Partners’ Capital A/c       (Interest on Drawing)	xxxxx xxxxx
		xxxxxx			xxxxxx

v  Preparation of Capital Accounts

Capital Accounts: There is not much difference between the accounts of a partnership firm and that of sole proprietorship. The only point to remember is that instead of one capital account, there will be a capital account. The capital accounts of partners may be maintained in any one of the following two methods:

1. Fixed Capital Accounts
2. Fluctuating Capital Accounts

1. Fixed Capital Accounts: In the case of Fixed Capital, the partners are not allowed to change their capitals during the lifetime of business except in extra ordinary circumstances. Under this method, the capital balances of the partners remain unaltered and all the transactions, which can affect the balances of the partners, are passed through current accounts. So under this arrangement, capital accounts and current accounts of the partners are prepared. All the entries relating to drawings, interest on drawings, salary to partner, share of profit or loss etc., is made in a newly opened account for each partner, this account is called current account.
2. Fluctuating Capital Accounts: When the capitals need not to be fixed the balances of capital accounts go on changing from time to time. The reason is that no separate Current Accounts are maintained, but al the entries relating to drawings, interest on capitals, interest on drawings, salary to partners, share of profit or loss etc., are recorded in the capital accounts itself.

Distinction between Fixed Capital Accounts and Fluctuating Capital Accounts:

S. No.	Basis of Distinction	Fixed Capital Accounts	Fluctuating Capital Accounts
1.	Change in Capital	When the Capitals are fixed, the balances in capital accounts usually remain unchanged during the lifetime of business, except in extraordinary circumstances.	When the capitals are fluctuating the balances in capital accounts go on changing from time to time.
2.	Number of Accounts	When the Capitals are fixed, each partner has two accounts, namely, Capital Account and a Current Account.	When the Capitals are fluctuating each partner has only one account, namely, capital Account.
3.	Recording of Transactions	When the capitals are fixed, transactions relating to drawings, interest on capital, interest on drawings, salary, share of profit or loss etc. are not made in Capital Accounts but are entered in separate Current Accounts.	In this case all transactions relating to partners are made directly in the capital accounts itself.
4.	Can a Capital Account Show a negative balance?	Fixed Capital Account can never show a negative balance.	Fluctuating Capital Account can show a negative balance.