In Maharashtra board partnership final accounts, is interest on capital shown in Profit and Loss Account or in an Appropriation Account?

Question

I'm in 12th Commerce, Maharashtra board. My cousin is in CBSE and his book puts interest on capital and partner's salary in a Profit and Loss Appropriation Account. Our Book Keeping textbook problems seem to put them straight in the Profit and Loss Account. Which one is correct for our board exam, and does the final capital change?

GradeHunt_Team · Answer

For the Maharashtra HSC exam, follow the Balbharati Std XII textbook (Chapter 1, Introduction to Partnership and Partnership Final Accounts). It does not use a Profit and Loss Appropriation Account in partnership final accounts. The partner items go into the Profit and Loss Account itself:

1. Interest on capital: debit side of Profit and Loss A/c, and credit to the partner's Capital or Current A/c.
2. Salary or commission to a partner: debit side of Profit and Loss A/c, credit to the partner's Capital or Current A/c.
3. Interest on drawings: credit side of Profit and Loss A/c, debit to the partner's Capital or Current A/c.
4. Interest on a partner's loan: debit side of Profit and Loss A/c. If it is still unpaid, add it to the partner's loan on the liabilities side of the Balance Sheet. (CBSE also treats this as a charge, not an appropriation.)
5. The balance left (net profit) is shared in the profit-sharing ratio and credited to the partners' Capital or Current Accounts.

Worked example
A and B share profits 3:2. Fixed capitals: A Rs 2,00,000, B Rs 1,00,000. Interest on capital 10% p.a. B gets salary Rs 2,000 per month. Interest on drawings: A Rs 600, B Rs 400. Profit before these items: Rs 1,00,000.

Profit and Loss A/c (partner items only):
Debit: Interest on capital 30,000 (A 20,000 + B 10,000), Salary to B 24,000
Credit: Interest on drawings 1,000
Net profit = 1,00,000 - 30,000 - 24,000 + 1,000 = Rs 47,000
A gets 3/5 = Rs 28,200, B gets 2/5 = Rs 18,800

Under the CBSE method the Profit and Loss A/c would show Rs 1,00,000 and the same items would be adjusted in the Appropriation A/c. The divisible profit is still Rs 47,000, so each partner's capital or current account ends at the same figure. Only the presentation changes.

In your board paper, show these items in the Profit and Loss A/c and pass them to the Capital or Current Accounts as the textbook does. Check the question first for fixed or fluctuating capital, because that decides whether the entries go to Current Accounts or Capital Accounts.

In Maharashtra board partnership final accounts, is interest on capital shown in Profit and Loss Account or in an Appropriation Account?

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