Question

Following is the extract of the Balance Sheet of Neelkant and Mahadev as on 31st March, 2019.

BALANCE SHEET
as at 31st March, 2019

Liabilities	₹	Assets	₹
Neelkant's Capital	10,00,000	Sundry Assets	30,00,000
Mahadev's Capital	10,00,000
Neelkant's Current A/c	1,00,000
Mahadev' Current A/c	1,00,000
Profit and Loss Appropriation A/c (2018-19)	8,00,000
	30,00,000		30,00,000

During the year, Mahadev's drawings were ₹ 30,000. Profits during the year ended 31st March, 2019 is ₹ 10,00,000. Calculate interest on capital @ 5% p.a. for the year ending 31st March, 2019.

Answer 1

Interest on Capital

Neelkant’s	$10,00,000\times \frac{5}{100}=50,000$
Mahadev’s	$10,00,000\times \frac{5}{100}=50,000$​

Note: In this question, as the balances of both Partner's Capital Account and of Partner's Current Account are mentioned, so it has been assumed that the capital of the partners is fixed.

As we know, when the capital of the partners is fixed, drawings and interest on capital does not affect the capital balances of the partners. Rather, it would affect their current account balances. Therefore, in this case, capital at the beginning (i.e. opening capital) and capital at the end (i.e. closing capital) of the year would remain same. Thus, the interest on capital is calculated on fixed capital balances (given in the Balance Sheet of the question).