Question

A, B, C and D are equal partners in a firm. Their capitals on 1st April, 2015 were Rs 50,000; Rs 30,000; Rs 25,000 and Rs 15,000 respectively. After closing the accounts for the year ended 31st March 2016 it was discovered that according to the partnership deed interest @ 10% per annum on partner's Capitals was not provided before distribution of profits. It was agreed among the partners to make the adjusting entry at the beginning of the next year rather than to alter the Balance Sheet. Pass the necessary journal entry assuming that the capitals are not fixed.

Answer 1

$\begin{array}{ccc}& & Rs\\ \text{Interest on A's Capital of Rs 50,000 @ 10\%}& =& 5,000\\ \text{Interest on B's Capital of Rs 30,000 @ 10\%}& =& 3,000\\ \text{Interest on C's Capital of Rs 25,000 @ 10\%}& =& 2,500\\ \text{Interest on D's Capital of Rs 15,000 @ 10\%}& =& 1,500\\ \text{Total Interest to be allowed}& Rs& \underset{–}{\overline{12,000}}\end{array}$

This amount of Rs 12,000 is an item of expense for the firm but this has not been recorded on the debit side of P & L App. A/c of the previous year. As such the profit of the previous year will be reduced by this amount. Hence, this loss of Rs 12,000 will be shared by the partners in their profit sharing ratio. Therefore, each partner should bear $\frac{12,000}{4}=Rs3,000$ as loss, This loss should be debited to their respective capital accounts and interest on capitals which they are entitled should be Credited to their Capital accounts.

TABLE SHOWING ADJUSTMENT

$\begin{array}{cccccc}& A& B& C& D& \text{Total}\\ & Rs& Rs& Rs& Rs& Rs\\ \text{Interest on Capital}(Cr.)& 5,000& 3,000& 2,500& 1,500& 12,000\\ \text{Division of Rs 12,000 in profit}& & & & & \\ \text{sharing ratio, i.e., equally (Dr.)}& 3,000& 3,000& 3,000& 3,000& 12,000\\ \text{Difference}& Cr.2,000& -& Dr.500& Dr.1,500& -\end{array}$

Necessary adjustment entry can be passed as follows:

JOURNAL ENTRY

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Dr. Rs}& \text{Cr. Rs}\\ 2016& & & & \\ \text{April}& \text{C's Capital A/c}Dr.& & 500& \\ 1& \text{D's Capital A/c}Dr.& & 1,500& \\ & \text{To A's Capital A/c}& & & 2,000\\ & \text{(Adjustment in respect of interest on capital omitted}& & & \\ & \text{in previous year's accounts)}& & & \end{array}$