Question

A and B entered into partnership with capitals of Rs 4,00,000 and Rs 2,00,000 respectively and agreed to share profits & losses in the ratio of 3:2. Their partnership deed provided that interest on capital shall be allowed at 6% p.a. and it is to be treated as a charge against profits. Prepare the relevant account to allocate the profit in the following alternative cases :

(i) If profit for the year is Rs 80,000;

(ii) If profit for the year is Rs 20,000;

(iii) If loss for the year is Rs 20,000.

Answer 1

Dr. PROFIT AND LOSS ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& Rs& \text{Particulars}& Rs\\ \text{Interest on Capital:}& & \text{Profit before interest}& 80,000\\ A24,000& & & \\ B\underset{–}{12,000}& 36,000& & \\ \text{Profit transferred to Profit}& & & \\ \text{\& Loss Appropriation A/c}& 44,000& & \\ & \underset{–}{\overline{80,000}}& & \underset{–}{\overline{80,000}}\end{array}$

Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& Rs& \text{Particulars}& Rs\\ \text{Profit transferred to:}& & \text{Profit \& Loss A/c}& 44,000\\ \text{A's Capital A/c (3/5)}26,400& & & \\ \text{B's Capital A/c (2/5)}\underset{–}{17,600}& 44,000& & \\ & \underset{–}{\overline{44,000}}& & \underset{–}{\overline{44,000}}\end{array}$

Note: Since interest on capital is a charge against profit, it will be debited to Profit & Loss A/c and not to Profit & Loss Appropriation A/c.

Case (ii)

Dr. PROFIT AND LOSS ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& Rs& \text{Particulars}& Rs\\ \text{Interest on Capital:}& & \text{Profit before interest}& 20,000\\ A24,000& & \text{Loss transferred to:}& \\ B\underset{–}{12,000}& 36,000& \text{A's Capital A/c (3/5)}9,600& \\ & & \text{B's Capital A/c(2/5)}6,400& 16,000\\ & \underset{–}{\overline{36,000}}& & \underset{–}{\overline{36,000}}\end{array}$

Case (iii)

Dr. PROFIT AND LOSS ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& Rs& \text{Particulars}& Rs\\ \text{Loss for the year}& 20,000& \text{Profit transferred to:}& \\ \text{Interest on Capital:}& & \text{A's Capital A/c (3/5)}33,600& \\ A24,000& & \text{B's Capital A/c (2/5)}\underset{–}{22,400}& 56,000\\ B\underset{–}{12,000}& 36,000& & \\ & \underset{–}{\overline{56,000}}& & \underset{–}{\overline{56,000}}\end{array}$