Question

$A$ and $B$ contribute $Rs.4,00,000$ and $Rs.2,00,000$ respectively as capital on which they agree to pay interest @ $6\%$ p.a. Their respective share of profit is $2:3$ and the profit (before interest) for the year is $Rs.30,000$. Show the relevant account to allocate interest on capitals:
(i) if the Partnership Deed is silent about the treatment of interest on capital, and
(ii) if interest is a charge as per the Partnership Deed.

Answer 1

1. PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To interest on capital A=30,000*4/6=20000 B=30,000*2/6=10,000	30,000	By net profit	30,000
Total	30,000	Total	30,000

When partnership deed is silent regarding interest as a charge or appropriation.

As the total amount of interest is more than the available profit,the interest should be allowed in the ratio of capital i.e 4:2

Interest on capital

A=4,00,000*6%=24,000

B=2,00,000*6%=12000

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To Interest on capital A= 4,00,000*6%=24000 B=2,00,000*6%=12000	36,000	By net profit By loss transferred A/c A=2400 B=3600	30,000
Total	36,000	Total	36,000