AccountsISC Class 12 · Fundamentals of Partnership

Profit and Loss Appropriation Account: ISC Class 12 Accounts

Updated 15 October 2026 · Fact-checked

The Profit and Loss Appropriation Account shows how a firm's net profit is divided among partners. It is credited with net profit and interest on drawings, and debited with interest on capital, salary, commission and transfer to reserve. The balance is shared in the profit-sharing ratio. Rent and loan interest to partners are charges, not appropriations.

Understand Profit and Loss Appropriation Account

Why a separate account? A partnership first finds its net profit in the Profit and Loss Account. Everything paid to partners *because they are partners* is then shown in the Profit and Loss Appropriation Account, which is simply an extension of the P&L Account. The CISCE syllabus asks you to prepare it along with the partners' capital and current accounts.

Charge or appropriation? This is the first decision in every question.

Charges against profit go to the Profit and Loss Account and are allowed even if the firm makes a loss: interest on a loan *given by* a partner to the firm, rent payable to a partner for his premises, and a manager's commission. The syllabus is explicit: interest on a partner's loan is debited to P&L and credited to his Loan Account; rent due to a partner is credited to his current account (fixed capitals) or capital account (fluctuating capitals).
Appropriations go to the Appropriation Account and are made only out of profit: interest on capital, partners' salary and commission, transfer to reserve and the final division of profit.

Rules when there is no deed (Indian Partnership Act, 1932). Profits are shared equally; no interest on capital; no interest on drawings; no salary or commission to a partner; interest at 6% a year on a loan advanced by a partner.

Interest on capital is calculated on the opening capital for the time it was used. Additional capital earns interest from the date it is introduced; a permanent withdrawal of capital stops interest from that date. If opening capital is not given, work back: Opening capital = Closing capital + Drawings − Share of profit − Additional capital (+ any loss).

Interest on drawings is charged on the amount for the time it was outside the firm. Equal amounts withdrawn every month: at the beginning use 6.5 months, in the middle 6 months, at the end 5.5 months. Unequal amounts on different dates: use the product method (amount × months to year-end, total × rate ÷ 12). A withdrawal *from capital* is not a drawing against profit and attracts no interest on drawings; it reduces interest on capital instead.

Commission. On net profit *before* charging commission: Profit × rate/100. On net profit *after* charging it: Profit × rate/(100 + rate). The syllabus adds a limit: a partner's commission and a transfer to General Reserve are calculated on the correct trading profit, not on the divisible profit left after other appropriations.

Insufficient profit. If the profit is less than the total appropriations the deed promises, and the deed treats them as appropriations, the available profit is divided in the ratio of the appropriations (ISC examiners have asked for exactly this). If the deed calls interest on capital a *charge*, it is allowed in full and any resulting loss is shared in the profit-sharing ratio.

Guarantee of profit. When a partner is guaranteed a minimum share, the deficiency is borne by the guaranteeing partners in their agreed ratio (or their profit-sharing ratio if nothing is said).

Profit and Loss Appropriation Account: key facts

Debit side of the Appropriation Account: Interest on capital
Salary to partners
Commission to partners
Transfer to reserve
Share of profit to each partner; All are appropriations, made only out of profit.
Credit side of the Appropriation Account: Net profit (from P&L Account)
Interest on drawings
Net loss (if any) on the debit, shown as a deficit; Interest on drawings increases the divisible profit.
Charges, not appropriations: Interest on loan by a partner P&L Account
Rent to a partner P&L Account
Manager's commission P&L Account
Interest on loan to a partner credited to P&L Account; Allowed even when the firm makes a loss.
Average period for equal monthly drawings: Beginning of each month 6.5 months
Middle of each month 6 months
End of each month 5.5 months; For a full year of 12 withdrawals.
Commission after charging commission: Commission = Profit before commission × rate ÷ (100 + rate); Before charging: Profit × rate ÷ 100.
Product method for interest on drawings: Interest = Σ(amount × months to year-end) × rate ÷ 100 ÷ 12; For unequal amounts on different dates.
Opening capital worked back: Closing capital + Drawings − Share of profit − Additional capital; Add back a share of loss instead of subtracting profit.

Interest on loan by a partner	P&L Account
Rent to a partner	P&L Account
Manager's commission	P&L Account
Interest on loan to a partner	credited to P&L Account

Beginning of each month	6.5 months
Middle of each month	6 months
End of each month	5.5 months

How to answer Profit and Loss Appropriation Account questions

Most ISC appropriation questions are 6- or 10-mark problems that test the order of work as much as the arithmetic. Follow this sequence.

1Underline every clause of the deed and mark each item 'charge' or 'appropriation'.
2Pass charges (partner's loan interest, rent to a partner) through the P&L Account to reach the correct net profit.
3Compute commission and transfer to reserve on that correct trading profit, using the before or after charging formula as stated.
4Compute interest on capital for the period each amount was used, and interest on drawings by average period or the product method.
5Total the appropriations; if they exceed the profit available, share the profit in the ratio of the appropriations.
6Divide the balance in the profit-sharing ratio, then post every item to the current accounts (fixed capitals) or capital accounts (fluctuating capitals).

Profit and Loss Appropriation Account in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Rewarding capital before sharing profit

Suppose two friends open a tiffin service. Asha puts in ₹2,00,000 and Bilal ₹1,00,000. They agree to share profit equally but also to pay each other 9% interest on capital, because Asha's money is at greater risk. The first year's profit is ₹1,20,000.

How much does each friend take home from the profit, and why is the split not equal?

Try it first, then show the solutionSolution

Interest on capital: Asha 2,00,000 × 9% = ₹18,000; Bilal 1,00,000 × 9% = ₹9,000.
Profit left = 1,20,000 − 27,000 = ₹93,000, shared equally: ₹46,500 each.
Asha = 18,000 + 46,500 = ₹64,500; Bilal = 9,000 + 46,500 = ₹55,500.

Answer: Asha ₹64,500 and Bilal ₹55,500. Interest on capital rewards the bigger investment first; only the remainder is shared equally.

Memory hook: Pay the money its rent, then split what is left.

Tricks to remember Profit and Loss Appropriation Account

Short memory aids. Say each one aloud once, then use it on a question the same day.

Loan, Rent, Manager: LRM goes to P&L
Interest on a partner's Loan, Rent to a partner and a Manager's commission are charges, so they go to the P&L Account, not the Appropriation Account.
Use it when: Sorting items before you draw the account.
6.5 – 6 – 5.5
Beginning, middle, end: the later in the month the money goes out, the shorter the average period.
Use it when: Interest on equal monthly drawings.
After means 100 plus
Commission 'after charging such commission' divides by (100 + rate).
Use it when: Commission questions.

Profit and Loss Appropriation Account: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Commission after charging commission · 1 mark · MCQBoard level

The net profit of a firm before charging a partner's commission is ₹1,65,000. The partner is entitled to a commission of 10% of the net profit after charging such commission. The commission is:
(a) ₹16,500
(b) ₹15,000
(c) ₹18,333
(d) ₹14,850

Try it first, then show the solutionSolution

After charging: Profit × rate ÷ (100 + rate).
1,65,000 × 10 ÷ 110 = ₹15,000.

Answer: (b) ₹15,000

Example 2: Interest on equal monthly drawings · 3 marks · Short answerBoard level

Kavya, a partner, withdrew ₹6,000 at the beginning of every month during the year ended 31st March 2026. Interest on drawings is charged at 9% per annum. Calculate the interest on her drawings and pass the journal entry. (3 marks)

Try it first, then show the solutionSolution

Total drawings = 6,000 × 12 = ₹72,000; average period for withdrawals at the beginning of each month = 6.5 months.
Interest = 72,000 × 9/100 × 6.5/12 = ₹3,510.
Entry: Kavya's Current A/c Dr ₹3,510; To Interest on Drawings A/c ₹3,510 (later closed to the P&L Appropriation A/c).

Answer: Interest on drawings = ₹3,510.

Example 3: Interest on capital with additions and a withdrawal · 3 marks · Short answerHarder board level

Ishan's capital on 1st April 2025 was ₹4,00,000. He introduced further capital of ₹60,000 on 1st October 2025 and permanently withdrew ₹40,000 of capital on 1st January 2026. Interest on capital is allowed at 8% per annum. Calculate the interest on his capital for the year ended 31st March 2026. (3 marks)

Try it first, then show the solutionSolution

On opening capital for 12 months: 4,00,000 × 8% = ₹32,000.
On addition for 6 months: 60,000 × 8% × 6/12 = ₹2,400.
Less on withdrawal for 3 months: 40,000 × 8% × 3/12 = ₹800.
Total = 32,000 + 2,400 − 800 = ₹33,600. Check by balances: (4,00,000 × 6 + 4,60,000 × 3 + 4,20,000 × 3) × 8% ÷ 12 = ₹33,600.

Answer: Interest on capital = ₹33,600.

Example 4: Preparing the Appropriation Account · 6 marks · Long answerHarder board level

Neel and Tara are partners sharing profits 3:2, with fixed capitals of ₹5,00,000 and ₹3,00,000. The deed provides: interest on capital at 10% p.a.; Tara a salary of ₹2,500 per month; Neel a commission of 5% of the net profit after charging such commission; 10% of the net profit to be transferred to General Reserve. Interest on drawings is Neel ₹3,600 and Tara ₹2,400. Net profit for 2025-26 before Neel's commission is ₹2,52,000. Prepare the Profit and Loss Appropriation Account. (6 marks)

Try it first, then show the solutionSolution

Commission = 2,52,000 × 5/105 = ₹12,000. General Reserve = 10% of the trading profit ₹2,52,000 = ₹25,200 (on the correct trading profit, as the syllabus requires).
Interest on capital: Neel ₹50,000, Tara ₹30,000. Salary to Tara = ₹30,000.
Credit side: By P&L A/c 2,52,000; By Interest on Drawings 6,000 (Neel 3,600, Tara 2,400); total ₹2,58,000.
Debit side before profit share: 80,000 + 30,000 + 12,000 + 25,200 = ₹1,47,200.
Balance = 2,58,000 − 1,47,200 = ₹1,10,800: Neel 3/5 = ₹66,480; Tara 2/5 = ₹44,320. Both sides total ₹2,58,000.

Answer: Profit shared: Neel ₹66,480, Tara ₹44,320; account totals ₹2,58,000.

Example 5: Insufficient profit: ratio of appropriations · 6 marks · Long answerHOTS / competency

Mira and Dev share profits equally with capitals of ₹4,00,000 and ₹2,00,000. The deed allows interest on capital at 12% p.a. and a salary of ₹18,000 a year to Dev, both as appropriations. The firm's net profit for the year is ₹60,000. Show how the profit is distributed. (6 marks)

Try it first, then show the solutionSolution

Appropriations due: Mira interest ₹48,000; Dev interest ₹24,000 + salary ₹18,000 = ₹42,000; total ₹90,000.
Profit ₹60,000 is less than ₹90,000, so it is shared in the ratio of appropriations 48,000 : 42,000 = 8 : 7.
Mira = 60,000 × 8/15 = ₹32,000; Dev = 60,000 × 7/15 = ₹28,000.
No balance remains for the profit-sharing ratio; nothing is shared as a loss.

Answer: Mira ₹32,000 and Dev ₹28,000 (shown as interest on capital and salary in proportion).

Example 6: Interest on capital treated as a charge · 3 marks · Short answerHOTS / competency

Mira and Dev share profits equally with capitals of ₹3,00,000 and ₹1,50,000. Their deed says interest on capital at 12% p.a. is a charge against profit. Profit before interest is ₹45,000. Find each partner's net credit from the year's results. (3 marks)

Try it first, then show the solutionSolution

As a charge, interest is allowed in full: Mira ₹36,000, Dev ₹18,000; total ₹54,000.
Result after interest = 45,000 − 54,000 = loss of ₹9,000, shared equally: ₹4,500 each.
Net credit: Mira 36,000 − 4,500 = ₹31,500; Dev 18,000 − 4,500 = ₹13,500.

Answer: Mira ₹31,500, Dev ₹13,500 (interest in full, loss of ₹9,000 shared equally).

Where students lose marks in Profit and Loss Appropriation Account

The slips examiners see most often, and what to write instead.

Mistake: Taking rent or loan interest to the Appropriation Account
Every payment to a partner looks like an appropriation.
Wrong working
P&L Appropriation A/c Dr 18,000 To Partner's Current A/c (rent)
Right working
Profit and Loss A/c Dr 18,000 To Partner's Current A/c (rent is a charge)
Do this: Ask: would this be paid to an outsider too? If yes, it is a charge.
Usually costs: 1-2 marks, and the net profit carried down goes wrong.
Mistake: Charging interest on drawings on a withdrawal of capital
Not reading whether the money came out of capital or out of profits.
Wrong working
Interest on drawings on ₹20,000 permanent withdrawal
Right working
No interest on drawings; interest on capital is reduced from the date of withdrawal
Do this: ISC examiners flagged this in 2024 and 2025: separate permanent (capital) and temporary (profit) withdrawals.
Usually costs: 1-2 marks.
Mistake: Commission on divisible profit
Calculating commission after deducting interest on capital and salary.
Wrong working
10% × (1,80,000 − 30,000) = 15,000
Right working
10% × 1,80,000 = 18,000 (correct trading profit)
Do this: The syllabus limit: commission and reserve are on trading profit, not divisible profit.
Usually costs: 1 mark plus a wrong balance.
Mistake: Showing a loss when profit is insufficient
Allowing every appropriation in full.
Wrong working
Appropriations 90,000 against profit 60,000; loss 30,000 shared
Right working
Share 60,000 in the ratio of appropriations 8:7
Do this: Appropriations cannot exceed the profit unless the deed calls them charges.
Usually costs: 2-3 marks.

Exam tips

Head the account 'Profit and Loss Appropriation Account for the year ended ...', write 'By Profit and Loss A/c' (not 'By Net Profit') and show dates: ISC examiners penalised missing headings in 2025.
Under the fixed capital method, interest, salary, commission and profit share go to the current accounts; capital accounts change only for capital introduced or withdrawn.
Count the months carefully: a firm started on 1st July allows interest on capital for 9 months, not 12.
Show every calculation as a working note; method marks are awarded even when the final figure slips.

Practice questions on Profit and Loss Appropriation Account

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
In the absence of a partnership deed, interest on a loan advanced by a partner to the firm is allowed at:
(a) 5% p.a.
(b) 6% p.a.
(c) 8% p.a.
(d) nil
Hint
Indian Partnership Act, 1932.
Answer
(b) 6% p.a.
Q2 · 1 mark · MCQBoard level
Rent payable to a partner for the use of his building by the firm is debited to:
(a) P&L Appropriation A/c
(b) Partner's Capital A/c
(c) Profit and Loss A/c
(d) Partner's Current A/c
Hint
Charge or appropriation?
Answer
(c) Profit and Loss A/c
Q3 · 3 marks · Short answerBoard level
A partner withdrew ₹5,000 at the end of every month for a year. Interest on drawings is 6% p.a. Calculate the interest. (3 marks)
Hint
End of month: 5.5 months.
Answer
60,000 × 6% × 5.5/12 = ₹1,650.
Q4 · 3 marks · Short answerHarder board level
A firm's net profit before charging commission is ₹2,10,000. A partner is to get 5% of the net profit after charging such commission. Calculate the commission. (3 marks)
Hint
Divide by 105.
Answer
2,10,000 × 5/105 = ₹10,000 (check: 5% of 2,00,000 = 10,000).
Q5 · 3 marks · Short answerHarder board level
Rohan withdrew ₹10,000 on 1st July 2025, ₹8,000 on 1st October 2025 and ₹6,000 on 1st February 2026. The year ends on 31st March 2026 and interest on drawings is 10% p.a. Calculate the interest by the product method. (3 marks)
Hint
Months to year-end: 9, 6 and 2.
Answer
Products = 90,000 + 48,000 + 12,000 = 1,50,000; interest = 1,50,000 × 10% ÷ 12 = ₹1,250.
Q6 · 6 marks · Long answerHarder board level
Anu, Ben and Cara share profits 2:2:1. Cara is guaranteed a minimum profit of ₹40,000, any deficiency to be borne by Anu and Ben equally. The firm's profit is ₹1,50,000. Show the distribution of profit. (6 marks)
Hint
Find Cara's share first, then the deficiency.
Answer
Cara's share = 1,50,000 × 1/5 = 30,000; deficiency 10,000 borne 5,000 each. Anu 60,000 − 5,000 = ₹55,000; Ben ₹55,000; Cara ₹40,000 (total ₹1,50,000).
Q7 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Where the deed treats interest on capital as an appropriation, no interest on capital is allowed in a year of loss.
Reason (R): Appropriations are made only out of profits.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
What is an appropriation?
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q8 · 3 marks · Short answerHarder board level
Lata's capital on 31st March 2026 was ₹3,30,000 after crediting her share of profit ₹50,000 and debiting drawings ₹40,000. She had introduced additional capital of ₹20,000 on 1st October 2025. Interest on capital (10% p.a.) has not yet been credited. Calculate her opening capital and the interest on capital. (3 marks)
Hint
Closing + drawings − profit − addition.
Answer
Opening capital = 3,30,000 + 40,000 − 50,000 − 20,000 = ₹3,00,000. Interest = 3,00,000 × 10% + 20,000 × 10% × 6/12 = 30,000 + 1,000 = ₹31,000.
Q9 · 6 marks · Long answerHOTS / competency
Pallav and Qadir have capitals of ₹4,00,000 and ₹3,00,000. The deed allows interest on capital at 10% p.a., a salary of ₹24,000 a year to Qadir and a commission of ₹6,000 to Pallav, all as appropriations. The net profit is ₹80,000. Distribute it. (6 marks)
Hint
Total appropriations exceed the profit.
Answer
Pallav 40,000 + 6,000 = 46,000; Qadir 30,000 + 24,000 = 54,000; total 1,00,000 > 80,000. Ratio 46:54. Pallav = 80,000 × 46/100 = ₹36,800; Qadir = ₹43,200.
Q10 · 3 marks · Short answerHOTS / competency
A firm's profit as per the P&L Account is ₹1,80,000. Interest on capital is ₹30,000. A partner is entitled to a commission of 10% of net profit before charging commission. A student calculated the commission as ₹15,000. Is the student right? Give the correct figure with a reason. (3 marks)
Hint
Trading profit or divisible profit?
Answer
No. The student used divisible profit (1,80,000 − 30,000). Commission must be on the correct trading profit: 10% × 1,80,000 = ₹18,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Average period for equal drawings made in the middle of every month?Show answer
6 months.
2.Commission at 4% after charging, on profit of ₹2,60,000 before commission?Show answer
2,60,000 × 4/104 = ₹10,000.
3.Name two items that are charges, not appropriations.Show answer
Interest on a partner's loan to the firm; rent to a partner (also a manager's commission).
4.With no deed, how are profits shared?Show answer
Equally.
5.Profit ₹30,000, appropriations due ₹20,000 and ₹30,000: how is it shared?Show answer
In the ratio of appropriations 2:3, so ₹12,000 and ₹18,000.

Profit and Loss Appropriation Account: frequently asked questions

Is the Profit and Loss Appropriation Account part of the P&L Account?

It is an extension of it. The P&L Account finds the net profit after all charges; the Appropriation Account shows how that profit is distributed among partners.

Is interest on drawings a gain for the firm?

Yes. It is credited to the Appropriation Account and increases the profit available for distribution, while it is debited to the partners' current or capital accounts.

What if the deed says nothing about interest on capital?

No interest on capital is allowed. Section 13 of the Indian Partnership Act gives no such right without an agreement.

How do fixed and fluctuating capitals change the postings?

With fixed capitals, appropriations and drawings go to the partners' current accounts. With fluctuating capitals they go straight to the capital accounts.