Drawings in Profit and Loss Appropriation Account

In the context of the Profit and Loss Appropriation Account, drawings refer to the amounts withdrawn by partners from their partnership business for personal use. These withdrawals are treated as a reduction in the partner's capital and are not considered as business expenses. Therefore, drawings are not included in the Profit and Loss Account but instead are accounted for in the Profit and Loss Appropriation Account.

Profit and Loss Appropriation Account

The Profit and Loss Appropriation Account is a financial statement that shows how the net profit or loss of a partnership is distributed among the partners. It is prepared after the Profit and Loss Account and includes various appropriation items such as interest on capital, salaries, commission, and most importantly, the treatment of drawings.

Drawings in the Profit and Loss Appropriation Account

Drawings are shown as a deduction in the Profit and Loss Appropriation Account because they represent a reduction in the partner's capital. The treatment of drawings in the account can vary depending on whether the partnership is using the fixed capital method or the fluctuating capital method.

Fixed Capital Method

In a partnership using the fixed capital method, the drawings of each partner are deducted from their respective capital accounts directly in the Profit and Loss Appropriation Account. This deduction reduces the partner's capital and reflects their personal withdrawals.

Fluctuating Capital Method

In a partnership using the fluctuating capital method, the drawings of each partner are transferred to their respective current accounts. The current accounts are then adjusted by adding the drawings to the partner's capital at the beginning of the year and deducting the drawings at the end of the year. The adjusted capital is then shown in the Profit and Loss Appropriation Account.

Example

Let's consider a partnership where Partner A has made drawings of $10,000 and Partner B has made drawings of $15,000 during the year. In the Profit and Loss Appropriation Account, the drawings would be shown as follows:

Partner A:
- Opening capital $50,000
- Add: Share of profit $20,000
- Less: Drawings $10,000
- Closing capital $60,000

Partner B:
- Opening capital $80,000
- Add: Share of profit $25,000
- Less: Drawings $15,000
- Closing capital $90,000

The ultimate goal of accounting for drawings in the Profit and Loss Appropriation Account is to determine the final capital of each partner after considering their share of profits, share of losses, and personal withdrawals.

Drawing put on liability sides.. left side