Which of the following item is not shown in the Profit and Loss Appropriation Account?
Which of the following item is not shown in the Profit and Loss Appropriation Account?
Solution
The Profit and Loss Appropriation Account is prepared to show how the net profit earned by a partnership firm is distributed among partners. It is prepared after the Profit and Loss Account.
Items recorded in Profit and Loss Appropriation Account are related to distribution/appropriation of profits among partners:
Partner's Salary → Appropriation of profit, shown in Profit and Loss Appropriation Account
Interest on Drawings → Charged from partners and added to profits before distribution, shown in Profit and Loss Appropriation Account
Interest on Capital → Paid to partners as appropriation of profit, shown in Profit and Loss Appropriation Account
Depreciation → This is a business expense recorded in the Profit and Loss Account (not Appropriation Account). It is charged before arriving at net profit.
The key distinction is that Depreciation reduces the profit of the business and is treated as an expense in normal trading operations. It appears in the Profit and Loss Account along with other expenses like rent, salaries to employees, etc.
The Profit and Loss Appropriation Account only deals with items that show how the already calculated net profit is divided among partners. Since Depreciation is charged before calculating net profit, it cannot appear in the Appropriation Account.