Re-Appropriations

We know that "Interest on Capital", "Salary to Partners", "Commission to Partners", etc., are all appropriations of profits. A mistake with regard to appropriations arises in cases where there are (a) Errors in calculations of the appropriable amounts, and (b) Accounting errors i.e. errors in recording or posting these transactions. An error in relation to appropriation of profits would result in an error in the amount that is debited/credited to the Partners Capital a/c's. Where such errors are subsequently identified they need to be corrected by re-appropriation of profits already appropriated. These re-appropriations would influence only the Partners Capital a/c's. Re-appropriation can be understood as taking back the amount that has been erroneously distributed and distributing the correct amounts again. The re-appropriations to be made may pertain to profits relating to a single accounting period or two or more accounting periods.

Profit and Loss Re-Appropriation a/c

To give a clear understanding as to the reason for which the recordings are being done, we use a separate account to deal with these transactions of re-appropriations. We name the account "Profit and Loss Re-Appropriation a/c". This account is sometimes named "Profit and Loss Adjustment a/c" or "Profit and Loss Re-Adjustment a/c".

Illustration » A Problem

Radha, Nimmi and Bindu are partners in a firm sharing profits and losses in the ratio 1 : 3 : 2. They had made a profit of Rs. 2,40,000 during the last accounting period. They were entitled to a salaries of Rs. 8,000, Rs. 10,000 and Rs. 12,000 respectively. The profits after charging their salaries was distributed among the partners in their profit sharing ratio. It was later discovered that the following appropriations have not been taken into consideration while distributing the profits. Commission of Rs. 8,000 payable to Bindu Interest on Fixed Capitals payable to Radha, Nimmi and Bindu as Rs. 5,000, Rs. 6,000 and Rs. 5,000 respectively. Interest on Drawings chargeable to Radha, Nimmi and Bindu as Rs. 1,000, Rs. 1,500 and Rs. 500 respectively. You are required to make adjustments for the above and set right the accounts.

Illustration » Working Notes

Appropriations and Profits Share (already done) Total Radha Nimmi Bindu (a) Net Profit (b) Appropriations: Salary to Partners 2,40,000 − 30,000   + 8,000   + 10,000   + 12,000     Total (b) (c) Distributable Profits   (a) − (b) (d) Share of Distributable Profit − 30,000 + 2,10,000 − 2,10,000 + 8,000 + 35,000 + 10,000 + 1,05,000 + 12,000 + 70,000 (e) Total Appropriations (2,40,000) + 43,000 + 1,15,000 + 82,000 • Distribution of Profits among Partners » Profit Sharing Ratio ⇒ Radha : Nimmi : Bindu = 1 : 3 : 2 = 1 6 : 3 6 : 2 6 » Share of Distributable Profits Partners Share of Profits = Distributable Profit × Profit Sharing Proportion Therefore, Radha's Share = Rs. 2,10,000 × 1 6 = Rs. 35,000 Nimmi's Share = Rs. 2,10,000 × × 3 6 = Rs. 1,05,000 Bindu's Share = Rs. 2,10,000 × × 2 6 = Rs. 70,000 Rs. 2,10,000 Appropriations and Profits Share (that should have been done) Total Radha Nimmi Bindu (a) Net Profit (b) Appropriations: Salary to Partners Commission to Partners Interest on Capital Interest on Drawings 2,40,000 − 30,000 − 8,000 − 16,000 + 3,000   + 8,000 – + 5,000 − 1,000   + 10,000 – + 6,000 − 1,500   + 12,000 + 8,000 + 5,000 − 500     Total (b) (c) Distributable Profits   (a) − (b) (d) Share of Distributable Profits − 51,000 + 1,89,000 − 1,89,000 + 12,000 + 31,500 + 14,500 + 94,500 + 24,500 + 63,000 (e) Total Appropriations (2,40,000) + 43,500 + 1,09,000 + 87,500 • Distribution of Profits among Partners » Share of Distributable Profits Partners Share of Profits = Distributable Profit × Profit Sharing Proportion Therefore, Radha's Share = Rs. 1,89,000 × 1 6 = Rs. 31,500 Nimmi's Share = Rs. 1,89,000 × × 3 6 = Rs. 94,500 Bindu's Share = Rs. 1,89,000 × × 2 6 = Rs. 63,000 Rs. 1,89,000

Illustration » Solution (Re-appropriation)

Under this method for re-appropriating profits, all the amounts that have been appropriated earlier would be redrawn and the appropriation would be made appropriately in full again. This gives the maximum possible information regarding the re-appropriations and is requires the maximum entries to be recorded. Re-appropriating profits in the above illustration needs us to record the following transactions. The total amounts that were appropriated to the partners earlier are brought back. [Journal Entries Hide/Show] Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Radha Capital a/c Nimmi Capital a/c Bindu Capital a/c       To Profit/Loss Re-appropriation a/c Dr Dr Dr – – – – 43,000 1,15,000 82,000 2,40,000 [For the amount profits appropriated earlier in an erroneous manner brought back from the partners capital accounts.] The profits are appropriated in the correct manner again . [Journal Entries Hide/Show] Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Profit/Loss Re-appropriation a/c       To Interest on Capital a/c       To Salary to Partners a/c       To Commission to Partners a/c Dr – – – – 54,000 16,000 30,000 8,000 [For the amount of profits appropriated towards interest on capital, salaries, commission payable to partners.] March 31st – Interest on Drawings a/c       To Profit/Loss Re-appropriation a/c Dr – – 3,000 3,000 [For the interest on drawings chargeable to partners.] March 31st – Interest on Capital a/c       To Radha Capital a/c       To Nimmi Capital a/c       To Bindu Capital a/c Dr – – – – 16,000 5,000 6,000 5,000 [For the interest on capital appropriated to partners.] March 31st – Salary to Partners a/c       To Radha Capital a/c       To Nimmi Capital a/c       To Bindu Capital a/c Dr – – – – 30,000 8,000 10,000 12,000 [For the salary to partners appropriated to partners.] March 31st – Commission to Partners a/c       To Bindu Capital a/c Dr – – 8,000 8,000 [For the commisson to partners appropriated to partners.] March 31st – Radha Capital a/c Nimmi Capital a/c Bindu Capital a/c       To Interest on Drawings a/c Dr Dr Dr – – – – 1,000 1,500 500 3,000 [For the interest on drawings charged to partners.] March 31st – Profit/Loss Re-appropriation a/c       To Distributable Profits a/c Dr – – 1,89,000 1,89,000 [For the profit that can be appropriated as distributable profits.] March 31st – Distributable Profits a/c       To Radha Capital a/c       To Nimmi Capital a/c       To Bindu Capital a/c Dr – – – – 1,89,000 35,000 1,05,000 70,000 [For the distributable profits shared among partners in their profit sharing ratio.] Dr Profit and Loss Re-Appropriation a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Salary To Partners: Radha Nimmi Bindu To Interest on Capital: Radha Nimmi Bindu To Comm. to Partner: Bindu To Distributable Profit c/d 8,000 10,000 12,000 5,000 6,000 5,000 8,000 30,000 16,000 8,000 1,89,000 By Appr. brought back: Radha Nimmi Bindu By Int on Drawings: Radha Nimmi Bindu 43,000 1,15,000 82,000 1,000 1,500 500 2,40,000 3,000     2,43,000     2,43,000 To Profit Share:       Radha       Nimmi       Bindu 43,500 1,09,000 87,500 1,89,000 By Distr Profit b/d   1,89,000     1,89,000     1,89,000

Illustration » Solution (Alternative)

Where there are appropriations that have been correctly done earlier, they may be left out of the process of re-appropriation thereby reducing the transactions to be dealt within in th process of re appropriation. Under this method, only those amounts which pertains to erroneous appropriations would be withdrawn from the partners and would be re appropriated. Taking the case of Salary paid to partners, the amounts appropriated as salary from the profits is correct and to that extent no adjustment need be made. But in withdrawing the total amount appropriated and re-appropriating them again we are undoing and redoing the transaction which may be avoided. Thus, the transaction relating to the appropriation of salaries is ignored and the rest of the amount that has been appropriated to the partners is withdrawn from their accounts. The transactions to be dealt with would be as follows Amount distributed as share of profits earlier is brought back from the partners capital accounts [Journal Entries Hide/Show] Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Radha Capital a/c Nimmi Capital a/c Bindu Capital a/c       To Profit/Loss Re-appropriation a/c Dr Dr Dr – – – – 35,000 1,05,000 70,000 2,10,000 [For the amount profits appropriated earlier to the extent they are erroneous brought back from the partners capital accounts.] But for the amount withdrawn from the partners capital accounts, this entry is the same as the one recorded in the above method. Statement for Ascertaining Amounts to be withdrawn Total Radha Nimmi Bindu Share of Distributable Profit + 2,10,000 − 35,000 − 1,05,000 − 70,000 Total Amount to be withdrawn + 2,10,000 − 35,000 − 1,05,000 − 70,000 The amounts that have not been appropriated earlier and those which have been appropriated earlier in an erroneous manner and have been withdrawn are re-appropriated now and the remaining profit is shared among partners in their profit sharing ratio [Journal Entries Hide/Show] Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Profit/Loss Re-appropriation a/c       To Interest on Capital a/c       To Commission to Partners a/c Dr – – – – 54,000 16,000 8,000 [For the amount of profits appropriated towards interest on capital, commission payable to partners.] March 31st – Interest on Drawings a/c       To Profit/Loss Re-appropriation a/c Dr – – 3,000 3,000 [For the interest on drawings chargeable to partners.] March 31st – Interest on Capital a/c       To Radha Capital a/c       To Nimmi Capital a/c       To Bindu Capital a/c Dr – – – – 16,000 5,000 6,000 5,000 [For the interest on capital appropriated to partners.] March 31st – Commission to Partners a/c       To Bindu Capital a/c Dr – – 8,000 8,000 [For the commisson to partners appropriated to partners.] March 31st – Radha Capital a/c Nimmi Capital a/c Bindu Capital a/c       To Interest on Drawings a/c Dr Dr Dr – – – – 1,000 1,500 500 3,000 [For the interest on drawings charged to partners.] March 31st – Profit/Loss Re-appropriation a/c       To Distributable Profits a/c Dr – – 1,89,000 1,89,000 [For the profit that can be appropriated as distributable profits.] March 31st – Distributable Profits a/c       To Radha Capital a/c       To Nimmi Capital a/c       To Bindu Capital a/c Dr – – – – 1,89,000 35,000 1,05,000 70,000 [For the distributable profits shared among partners in their profit sharing ratio.] Statement for Appropriation of withdrawn amounts Total Radha Nimmi Bindu (a) Amount Withdrawn (b) Appropriations Commission to Partners Interest on Capital Interest on Drawings 2,10,000 − 8,000 − 16,000 + 3,000   – + 5,000 − 1,000   – + 6,000 − 1,500   + 8,000 + 5,000 − 500     Total (b) (c) Distributable Profits   (a) − (b) (d) Share of Distributable Profits − 21,000 + 1,89,000 − 1,89,000 + 4,000 + 35,000 + 4,500 + 1,05,000 + 12,500 + 70,000 (e) Total Appropriations (2,10,000) + 43,000 + 1,15,000 + 82,000 All the entries recorded here would be the same as the ones recorded earlier, the only exception being the absence of transactions that have been dealt with properly in the first case and which have been ignored at the time of withdrawing appropriated amounts from the partners capital accounts. [Salary to Partners here] Dr Profit and Loss Re-Appropriation a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Interest on Capital: Radha Nimmi Bindu To Comm. to Partner: Bindu To Distributable Profit c/d 5,000 6,000 5,000 8,000 16,000 8,000 1,89,000 By Appr. brought back: Radha Nimmi Bindu By Int on Drawings: Radha Nimmi Bindu 35,000 1,05,000 70,000 1,000 1,500 500 2,10,000 3,000     2,43,000     2,43,000 To Profit Share:       Radha       Nimmi       Bindu 43,500 1,09,000 87,500 1,89,000 By Distr Profit b/d   1,89,000     1,89,000     1,89,000

Illustration » Solution (Modified Alternative)

The method of withdrawing the amounts related to erroneous appropriations only can be modified to withdraw only a part of the share of profits appropriated. In the above illustration, share of profits to the extent of Rs. 2,10,000 have been withdrawn and in re-appropriating share of profits to the extent of Rs. 1,89,000 have been distributed to partners. There has been no change in the ratio of profit sharing among partners. Thus it amounts to (a) withdrawing the 1,89,000 and redistributing the amounts as have been withdrawn and (b) withdrawing the remaining 21,000 (2,10,000 − 1,89,000) and redistributing it in a different manner. The redistribution process can be further simplified by withdrawing only the amount of Rs. 21,000 required for being redistributed in a different manner. The amount to be withdrawn can be ascertained from the re-appropriation to be made. Statement for Appropriation of withdrawn amounts Total Radha Nimmi Bindu (1) Appropriations to be made Commission to Partners Interest on Capital Interest on Drawings − 8,000 − 16,000 + 3,000 – + 5,000 − 1,000 – + 6,000 − 1,500 + 8,000 + 5,000 − 500     Total (1) − 21,000 + 4,000 + 4,500 + 12,500 Amount to be withdrawn + 21,000 − 3,500 − 10,500 − 7,000 • Share of Amounts to be withdrawn from partners Partners Share of Amount to be withdrawn = Amount to be withdrawn × Profit Sharing Proportion Therefore, Radha's Share = Rs. 21,000 × 1 6 = Rs. 3,000 Nimmi's Share = Rs. 21,000 × × 3 6 = Rs. 10,500 Bindu's Share = Rs. 21,000 × × 2 6 = Rs. 7,000 Rs. 21,000 Dr Profit and Loss Re-Appropriation a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Interest on Capital: Radha Nimmi Bindu To Comm. to Partner: Bindu 5,000 6,000 5,000 8,000 16,000 8,000 By Appr. brought back: Radha Nimmi Bindu By Int on Drawings: Radha Nimmi Bindu 3,500 10,500 7,000 1,000 1,500 500 21,000 3,000     24,000     24,000

Illustration » Solution (Using a Single Journal Entry)

The objective of error rectification is to set right the position rather than to re do everything. Therefore, if the firm wishes to ensure that the position is set right and does not wish to have the information relating to all the adjustments made during re-appropriation, then a single journal entry for the net effect would be recorded in place of all the above transactions. The net effect can be ascertained if we know what has been recorded and what should have been recorded. Statement for ascertainment of Adjustment to be made Total Radha Nimmi Bindu (1) Past Appropriation (withdrawn) (2) Re-Appropriation (to be made) + 2,40,000 − 2,40,000 − 43,000 + 43,500 − 1,15,000 + 1,09,000 − 82,000 + 87,500       Net Effect 0 + 500 − 6,000 + 5,500 Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Nimmi Capital a/c       To Radha Capital a/c       To Bindu Capital a/c Dr – – – 6,000 500 5,000 [For the adjustment made to capital accounts to make good the errors in appropriations.]

Author Credit : The Edifier

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