Harshad and Dhiman are in partnership since 1st April, 2018. No partnership agreement was made. They contributed ₹ 4,00,000 and ₹ 1,00,000 respectively as capital. In addition, Harshad advanced an amount of ₹ 1,00,000 to the firm on 1st October, 2018. Due to long illness, Harshad could not participate in business activities from 1st August, 2018 to 30th September, 2018. Profit for the year ended 31st March, 2019 was ₹ 1,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims :
(i) He should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in the ratio of capital;
Dhiman Claims :
(i) Profit should be distributed equally;
(ii) He should be allowed ₹ 2,000 p.m. as remuneration for the period he managed the business in the absence of Harshad;
(iii) Interest on Capital and loan should be allowed @ 6% p.a.
You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

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Solution

DISTRIBUTION OF PROFITS

Harshad Claims:

Decisions
(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.
(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims:

Decisions
(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.
(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration.
(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a.

Profit and Loss Adjustment Account

Dr. for the year ended 31st March, 2019
Cr.

Particulars

Amount
(₹)

Particulars

Amount
(₹)

Interest on Partner’s Loan Profit and Loss A/c
1,80,000

Harshad 1,00,000 × (6/100) × (6/12)

3,000

Profit and Loss Appropriation A/c

1,77,000

1,80,000

1,80,000

Profit and Loss Appropriation Account

Dr. for the year ended 31st March, 2019
Cr.

Particulars

Amount
(₹)

Particulars

Amount
(₹)

Profit transferred to Profit and Loss Adjustment A/c
1,77,000

Harshad’s Capital

88,500

Dhiman’s Capital

88,500

1,77,000

1,77,000

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R s .1, 00, 000

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Harshad Claims:

(i) He should be given interest @ 10% per annum on capital and loan;

(ii) Profit should be distributed in proportion of capital;

Dhiman Claims:

(i) Profits should be distributed equally;

(ii) He should be allowed Rs 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;

(iii) Interest on Capital and loan should be allowed @ 6% p.a.

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Profit and Loss Adjustment Account
Dr.	for the year ended 31st March, 2019				Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
Interest on Partner’s Loan			Profit and Loss A/c	1,80,000
Harshad 1,00,000 × (6/100) × (6/12)		3,000
Profit and Loss Appropriation A/c		1,77,000
		1,80,000		1,80,000

Profit and Loss Appropriation Account
Dr.	for the year ended 31st March, 2019				Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
Profit transferred to			Profit and Loss Adjustment A/c	1,77,000
Harshad’s Capital		88,500
Dhiman’s Capital		88,500

		1,77,000		1,77,000