Question

Arun and Arora were partners in a firm sharing profits in the ratio of 5:3, their fixed capital on 1-4-2010 were: Arun Rs 60,000 and Arora Rs 80,000. They agreed to allow interest on capital @ 12 % p.a. and to charge on drawing @ 15% p.a. The profit of the firm for the year ended 31-3-2011 before all the above adjustments were Rs 12,600. The drawing made by Arun were Rs 2,000 and by Arora Rs 4,000 during the year. Prepare Profit and Loss Appropriation A/c of Arun and Arora. Show your calculation clearly. The interest on capital will be allowed even if the firm incurs loss.

Answer 1

PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ended on 31st March,2011
Dr Cr
$\begin{array}{ccccc}\text{Particulars}& & \text{Amount}& \text{Particulars}& \text{Amount}\\ & & \text{(Rs)}& & \text{(Rs)}\\ \text{To Interest on Capital :*}& & & \text{By Profit and Loss A/c (Net Profit)}& 12,600\\ \text{Arun's Current A/c}& 7,200& & \text{By Interest on Drawings :**}& \\ \text{Arora's Current A/c}& \underset{–}{9,600}& 16800& \text{Arun's Current A/c 150}& \\ & & & \text{Arora's Current A/c}\underset{–}{300}& 450\\ & & & \text{By Net Loss transferred to :}& \\ & & & \text{Arun's Current A/c}2,344& \\ & & & \text{Arora's Current A/c}\underset{–}{1,406}& \underset{–}{3,750}\\ & & \overline{16,800}& & 16,800\end{array}$

Working Notes :

1. Interest on capital will be allowed even if the firm incurs a loss, that means interest on capital is a charge against profits. So, it should be debited to Profit and Loss Account and not to Profit and Loss Appropriation Account due to the requirement of the question.

2. Interest on drawings is calculated for 6 months because time period is not given.

Arun $=200\times \frac{15}{100}\times \frac{6}{12}=Rs150$

Arora $=400\times \frac{15}{100}\times \frac{6}{12}=Rs300$