All adjustments in respect of partner's salary, partner's commission, interest on capital, interest on drawings, etc. are made through:
All adjustments in respect of partner's salary, partner's commission, interest on capital, interest on drawings, etc. are made through:
Solution
The adjustments mentioned in the question are all appropriations of profit, not business expenses. Therefore, they need to be recorded in the Profit and Loss Appropriation Account.
To understand this clearly, we need to distinguish between:
Profit and Loss Account → Records business expenses and revenues to determine net profit or loss
Profit and Loss Appropriation Account → Shows how the net profit is distributed among partners
The items mentioned in the question:
- Partner's salary
- Partner's commission
- Interest on capital
- Interest on drawings
These are all distributions of profit among partners based on the partnership agreement. They represent appropriations (division) of profit, not expenses incurred to earn that profit.
The Profit and Loss Appropriation Account starts with the net profit transferred from Profit and Loss Account, then adjusts for these items, and finally distributes the remaining profit in the profit-sharing ratio.
Interest on drawings is added back (as it reduces what the partner is entitled to), while salary, commission, and interest on capital are deducted from available profits for distribution.
The final effect of these adjustments is then recorded in the Partners' Capital Accounts, but the actual adjustments are made through the Profit and Loss Appropriation Account.
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