Hari and Giri entered into partnership contributing capitals of Rs. 60,000 and Rs. 30,000 respectively. They agreed to share profits and losses in the ratio 2: 1. During the year Hari and Giri withdraw Rs. 10,000 and Rs. 6,000, respectively. The profit for the year ended December 31,1989 was Rs. 42,000. Prepare Profit and Loss Appropriation Account taking into consideration the following: i) Hari is to be allowed a salary of Rs. 3,000 p.a. ii) Interest on capitals is to be provided at 5% pp,. iii) Interest on Giri’s Loan Account of Rs, 20.000 is to be charged for the whole year. iv) Interest on drawings is to be charged at 6% p.n.

To prepare the Profit and Loss Appropriation Account, we need to follow the following steps:

Step 1: Calculate the total profit earned during the year.

Total profit = Rs. 42,000

Step 2: Calculate the interest on capital for Hari and Giri.

Interest on Hari’s capital = 5% of Rs. 60,000 = Rs. 3,000
Interest on Giri’s capital = 5% of Rs. 30,000 = Rs. 1,500

Step 3: Calculate the interest on Giri’s loan account.

Interest on Giri’s loan = 5% of Rs. 20,000 = Rs. 1,000

Step 4: Calculate the interest on drawings for Hari and Giri.

Interest on Hari’s drawings = 6% of Rs. 10,000 = Rs. 600
Interest on Giri’s drawings = 6% of Rs. 6,000 = Rs. 360

Step 5: Calculate the net profit after adjusting for interest and salary.

Net profit = Total profit – (Interest on capital for Hari + Interest on capital for Giri + Interest on Giri’s loan + Interest on Hari’s drawings + Interest on Giri’s drawings + Salary for Hari)
Net profit = 42,000 – (3,000 + 1,500 + 1,000 + 600 + 360 + 3,000)
Net profit = Rs. 32,540

Step 6: Allocate the net profit between Hari and Giri in the agreed ratio of 2:1.

Hari’s share = 2/3 of net profit = (2/3) x Rs. 32,540 = Rs. 21,693.33
Giri’s share = 1/3 of net profit = (1/3) x Rs. 32,540 = Rs. 10,846.67

Step 7: Prepare the Profit & Loss Appropriation Account.

Profit and Loss Appropriation Account for the year ended December 31, 1989

Particulars | Amount (Rs.)

Total profit | 42,000
Interest on Hari’s capital | 3,000
Interest on Giri’s capital | 1,500
Interest on Giri’s loan | 1,000
Interest on Hari’s drawings | 600
Interest on Giri’s drawings | 360
Salary for Hari | 3,000
Net profit | 32,540
Allocation of net profit: |

• Hari’s share (2/3) | 21,693.33
• Giri’s share (1/3) | 10,846.67

Total | 68,540

Note: The Profit and Loss Appropriation Account is a nominal account that is prepared to distribute the profit among the partners as per their agreed profit-sharing ratio.