fundamentals of Partnership | Class 12 | Accountancy | Chapter 1

Summary

This video provides a comprehensive explanation of the P&L Appropriation Account, focusing on the distribution of profits among partners in a firm. Key concepts covered include the terms and conditions in the partnership deed, such as interest on capital, salary, bonuses, and commissions. It distinguishes between net profit and divisible profit, explaining how these are calculated and distributed. The session also introduces the concept of interest on capital and drawings, essential components in the allocation process. The lecture concludes with a preview of the next class, which will focus on calculating interest on capital and drawings.

Takeaways

• 😀 The Profit and Loss Appropriation Account (P&L Appropriation Account) is used to distribute a firm's profits among partners, covering various terms in the partnership deed.
• 😀 The deed can specify interest on capital for partners who have invested in the business.
• 😀 Partners doing extra work may receive additional compensation, such as a salary, bonus, or commission, as specified in the deed.
• 😀 Divisible profit is the remaining profit after all expenses and distributions, which is then divided among the partners based on their agreed-upon ratio.
• 😀 Net profit is the total profit before considering any deductions like interest on capital, salary, bonus, etc.
• 😀 Interest on drawings is an income for the firm, charged when a partner withdraws money from the business.
• 😀 The firm must pay out interest on capital, salary, bonus, and other agreed terms as expenses, reducing the available divisible profit.
• 😀 Partners may decide to reserve some of the profits for future use, called reserves, instead of distributing all profits immediately.
• 😀 Any leftover divisible profit is distributed among the partners according to their profit-sharing ratio, after reserving for future use.
• 😀 The next lesson will focus on how to calculate interest on capital (IOC) and interest on drawings (IOD), which are important concepts in this chapter.

Q & A

What is the main purpose of the P&L Appropriation Account in a partnership firm?

The P&L Appropriation Account is used to distribute the profits of a partnership firm among the partners based on the terms set in the partnership deed, such as interest on capital, salaries, bonuses, and any reserves.

What are the possible terms and conditions that could be specified in the partnership deed?

The terms in the partnership deed can include interest on capital, additional salaries for partners doing extra work, bonuses, and commissions. It could also specify how profits should be shared and whether reserves should be set aside.

What is the difference between 'net profit' and 'divisible profit'?

'Net profit' is the total profit before any distributions are made (such as interest, salaries, etc.), while 'divisible profit' is the amount left after all such expenses and provisions, ready for distribution among the partners.

Why is interest on capital considered a firm expense?

Interest on capital is considered an expense for the firm because the firm has to pay it to the partners for the capital they have invested in the business.

What is interest on drawings, and why is it recorded as income for the firm?

Interest on drawings is charged when a partner withdraws money from the firm. It is recorded as income for the firm because it is an amount the firm receives from the partners for these withdrawals.

How does the P&L Appropriation Account handle extra work done by partners?

Partners who do extra work beyond their regular duties can receive additional compensation through salary, bonus, or commission. This is separately accounted for in the P&L Appropriation Account.

What is the purpose of creating reserves in the partnership firm?

Reserves are created to set aside a portion of the profits for future use, ensuring that not all profits are distributed among the partners. This provides financial security for the firm in the future.

How is the divisible profit shared among the partners?

The divisible profit is shared among the partners according to the profit-sharing ratio, as agreed upon in the partnership deed. If no ratio is specified, it is typically divided equally.

Why is interest on capital and salary considered separately in the profit distribution process?

Interest on capital and salary are treated separately to ensure that partners who have invested more or done extra work are compensated fairly for their contributions, before the remaining profit is distributed.

What will be covered in the next class, according to the transcript?

The next class will focus on how to calculate interest on capital (IOC) and interest on drawings (IOD). The instructor also mentions that other terms such as salary, bonus, and reserve will be provided directly.