Which of the following is an appropriation of profit while preparing P and L Appropriation account of a partnership firm?

Interest on partner's capital

The correct answer is Option 1 : Interest on partner's capital

Option 1: Interest on partner's capital: This is a reward given to a partner for their investment in the firm. It's considered an appropriation of profit because it's a deduction from the overall profit before it's distributed among partners.

Option 2: Interest on bank loan is also a charge against profit and will go to Profit and Loss account.

Option 3: Interest on loans and advances by a partner to a firm is a charge against the profit and it goes to profit & loss A/c and not P and L Appropriation Account.

Thus, only interest on partner's capital is appropriation of profit which is given if firm earns profit.

Profit and Loss Appropriation Account is prepared by a partnership firm to appropriate the net profit of the accounting year among the partners. Profit and Loss Appropriation Account is affected by the Partnership Deed or the Partnership Act. It is an extension of the Profit and Loss Account, and the items debited to the Profit and Loss Appropriation Account are not a charge against profit. The items debited and credited in this account are treated as appropriations of profit, and not a charge against profit. Net profit and Interest on drawings of the partners are credited, and Interest on capital of the partners, Partners’ Salary and Commission are debited to the Profit and Loss Appropriation Account. 

Profit and Loss Account is prepared by every organisation to know about the profit earned and loss incurred by the organisation in a financial year. It is prepared after the Trading and Profit and Loss Account, and helps to determine the Net Profit and Net Loss during an accounting year. It is debited with expenses and credited with income. Items debited to Profit and Loss Account is charge against profit.