Question

Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2017:

Balance Sheet as at March 31, 2017
	Amount		Amount
Liabilities	Rs	Assets	Rs
Neelkant’s Capital	10,00,000	Sundry Assets	30,00,000
Mahadev’s Capital	10,00,000
Neelkant’s Current Account	1,00,000
Mahadev’s Current Account	1,00,000
Profit and Loss Apprpriation
(March 2017)	8,00,000
	30,00,000		30,00,000

During the year Mahadev’s drawings were Rs 30,000. Profits during 2017 is Rs 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2017.

Answer 1

Interest on Capital

Neelkant’s	10,00,000 ×= Rs 50,000
Mahadev’s	10,00,000 × = Rs 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).