The steps in the Process of Preparing Profit and Loss Appropriation a…

The steps in the Process of Preparing Profit and Loss Appropriation account are:

(A) Transfer the net profit to the credit side of P & L Appropriation A/c
(B) Divide the Profit among partners in the Profit Sharing ratio
(C) Ascertain net profit after providing for all charges
(D) Debit the P & L Appropriation A/c with all appropriations like partners salary etc.
(E) Credit the P & L Appropriation A/c with interest on drawing and deficiency on account of partner's guarantee of earnings to the firm.

Choose the correct answer from the options given below.

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (C), (A), (D), (E), (B)

The Profit and Loss Appropriation Account starts with the net profit and ends with the division of the balance among partners:

(C) Ascertain net profit after providing for all charges — the profit must be known first.
(A) Transfer the net profit to the credit side of P & L Appropriation A/c — this opens the account.
(D) Debit the P & L Appropriation A/c with all appropriations like partners salary etc. — appropriations are charged next.
(E) Credit the P & L Appropriation A/c with interest on drawings and deficiency of guarantee — additions to the divisible profit.
(B) Divide the profit among partners in the profit sharing ratio — only the final balance is divided.

NCERT (2026-27 edition):
Profit and Loss Appropriation Account – “Profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account of the firm. It shows how the profits are appropriated or distributed among the partners. All adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made through this account. It starts with the net profit/net loss as per Profit and Loss Account.”

NCERT (2026-27 edition):
Distribution of profit and loss – “The distribution of profits among the partners is shown through a Profit and Loss Appropriation Account, which is merely an extension of the Profit and Loss Account. It is usually debited with interest on capital and salary/commission allowed to the partners, and credited with net profit as per Profit and Loss Account and the interest on drawings. The balance being profit or loss is distributed among the partners in the profit sharing ratio and transferred to their respective capital accounts.”