Question

Azad and Benny are equal partners. Their capitals are Rs 40,000 and Rs 80,000 respectively. After the accounts for the year have prepared it is discovered that interest at 5% pa as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the begining of the next year. Record the necessary journal entry.

Answer 1

Interest on capital @ 5%

$Azad\Rightarrow 40,000\times \frac{5}{100}=Rs2,000$

$Benny\Rightarrow 80,000\times \frac{5}{100}=Rs4,000$

Total Interest on Capital = $\overline{\underset{–}{6,000}}$

Profit wrongly distributed equal to amount of interest.

$\begin{array}{cccc}\text{Statement for Adjustment}& & \text{Azad}& \text{Benny}\\ \text{Profits Already Distributed}& \text{A}& \underset{–}{3,000}& \underset{–}{3,000}\\ \text{Interest on Capital}& \text{B}& \underset{–}{2,000}& \underset{–}{4,000}\\ \text{Difference (B-A)}& & \underset{–}{(1,000)}& \underset{–}{1,000}\\ & & \text{Dr}& \text{Cr}\end{array}$

Journal Entry

$\begin{array}{ccccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& & \text{Amt. (Cr)}\\ & \text{Azad's Capital A/c}& \text{Dr}& & 1,000& & \\ & \text{To Benny's Capital A/c}& & & & & 1,000\\ & \text{(Being profit adjusted among all partners)}& & & & & \end{array}$