Question

Mita and Usha are partners in a firm sharing profits in the ratio of 2 : 3. Their Capital Accounts as on 1st April, 2015 showed balances of Rs. 1,40,000 and Rs. 1,20,000 respectively. The drawings of Mita and Usha during the year 2015-16 were Rs. 32,000 and 24,000 respectively. Both the amounts were withdrawn on 1st January 2016. It was subsequently found that the following items had been omitted while preparing the final accounts for the year ended 31st March, 2016:
(a) Interest on Capital @ 6% p.a.

(b) Interest on Drawings @ 6% p.a.

(c) Mita was entitled to a commission of Rs. 8,000 for the whole year.

Showing your working clearly, pass a rectifying entry in the books of the firm.

Answer 1

The profits for the year 2015-16 has been distributed without providing for the interest on capital, salary and interest on drawings. We have to reverse the profits distributed in the ratio of 2:3 and pass entries for the adjustments.

As we have opening capitals, we will charge interest on the capital. So, rectifying entries are:-

Mita's Capital A/c Dr.

Usha's Capital A/c Dr.

To Profit and Loss Appropriation A/c

(Being profits credited to partners written back)

Profit and loss Appropriation A/c Dr. 15,600

To Interest on Capital A/c 15,600

Mita 8,400

Usha 7,200

(Being interest on capital debited to p&l appropriation account)

Interest on Capital A/c Dr. 15,600

To Mita's Capital A/c 8,400

To Usha's Capital A/c 7,200

(Being interest on capital credited to the partners)

Interest on Drawings A/c Dr. 840

Mita 480

Usha 360

To Profit and Loss Appropriation A/c 840

(Being interest on drawings charged to the partners credited to p&L appropriation A/c)

Mita's Capital A/c 480

Usha's Capital A/c 360

To Interest on Drawings A/c 840

(Being interest on drawings debited to partners)

Profit and Loss Appropriation A/c Dr 8000

To salary A/c 8000

(salary debited to p&L Appropriation Account)

Salary A/c Dr. 8000

To Mita's Capital A/c 8000

(Being salary credited to Mita's Account)

Profit and Loss Appropriation A/c Dr.

To Mita's Capital A/c

To Usha's Capital A/c

(being profits credited to partners)