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Difficulty: MediumProfit and Loss Appropriation Account

Musa and Audu are partners sharing profits and losses in the ratio 3:23:2. For the year ended 31 December 2025, the net profit before adjusting for interest on Musa's loan was ₦500,000₦500,000. The partnership agreement provides for the following:
- Interest on Musa's loan: ₦20,000₦20,000
- Interest on capital: Musa ��30,000��30,000, Audu ₦20,000₦20,000
- Salary to Audu: ₦70,000₦70,000 per annum
- Interest on drawings: Musa ₦10,000₦10,000, Audu ₦10,000₦10,000

What is the net divisible profit available for distribution among the partners?

Answer: 380000 ₦

Answer

The net divisible profit available for distribution is ₦380,000₦380,000.
The net divisible profit of ₦380,000₦380,000 is calculated by starting with the adjusted net profit after loan interest (₦500,000−₦20,000=₦480,000₦500,000 - ₦20,000 = ₦480,000), adding interest on drawings (₦10,000+₦10,000=₦20,000₦10,000 + ₦10,000 = ₦20,000), and subtracting appropriations comprising interest on capital (₦30,000+₦20,000=₦50,000₦30,000 + ₦20,000 = ₦50,000) and partner salary (₦70,000₦70,000).

Step-by-Step Solution

1
Deduct interest on partner's loan from net profit
Adjusted Net Profit = ₦480,000₦480,000
Interest on a partner's loan is a charge against profit in the Profit and Loss Account, not an appropriation.
2
Add total interest on drawings to net profit
Total Available Profit = ₦500,000₦500,000
Interest on drawings is paid by partners to the firm, which increases total profit available for appropriation.
3
Deduct appropriations of profit (interest on capital and partner salary)
Net Divisible Profit = ₦380,000₦380,000
Interest on capital (₦50,000₦50,000) and Audu's salary (₦70,000₦70,000) are appropriations of profit paid out of available profit.

Key Concept

Profit and Loss Appropriation Account Adjustments
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Topics

Profit and Loss Appropriation Account

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