Question

On March 31, 2014 the capital accounts of Elvin, Monu and Ahmed after making adjustments for profits, drawings, etc. were as, Elvin - Rs 80,000; Monu - Rs 60,000; and Ahmed - Rs 40,000. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital at 5% p.a. The drawings during the year were : Elvin - Rs 20,000; Monu - Rs 15,000; and Ahmed - Rs 9,000. Interest on drawings chargeable to the partners was Elvin - Rs 500; Monu - Rs 360 and Ahmed - Rs 200. The net profit for the year ended 31st March, 2014 amounted to Rs 1,20,000. The profit sharing ratio of the partners was 3:2:1.

Record the necessary adjustment entry for rectifying the above errors of omission. Show your workings.

Answer 1

Since interest on capitals is always calculated on opening capitals and the same have not been given, first of all, it is necessary to calculate the opening capitals :

$\begin{array}{cccc}\text{Particulars}& \text{Elvin}& \text{Monu}& \text{Ahmed}\\ & Rs& Rs& Rs\\ \text{Capitals as on 31.3.2014}& 80,000& 60,000& 40,000\\ \text{Less: Share of Profit (which has already been added)}& & & \\ \text{1,20,000 shared in the ratio of 3:2:1}& \underset{–}{60,000}& \underset{–}{40,000}& \underset{–}{20,000}\\ & 20,000& 20,000& 20,000\\ \text{Add: Drawings (Which were previously deducted)}& \underset{–}{20,000}& \underset{–}{15,000}& \underset{–}{9,000}\\ & \underset{–}{40,000}& \underset{–}{35,000}& \underset{–}{29,000}\end{array}$

Interest on Capital:

Elvin 5% on Rs 40,000 = Rs 2,000

Monu 5% on Rs 35,000 = Rs 1,750

Ahmed 5% on Rs 29,000 = Rs 1,450

TABLE SHOWING ADUSTMENT

$\begin{array}{ccccc}\text{Particulars}& \text{Elvin}& \text{Monu}& \text{Ahmed}& \text{Total}\\ & Rs& Rs& Rs& Rs\\ \text{Interest on Opening Capitals}& 2,000& 1,750& 1,450& 5,200\\ \text{Less: Interest on Drawings}& \underset{–}{(-)500}& \underset{–}{(-)360}& \underset{–}{(-)200}& \underset{–}{(-)1,060}\\ \text{Balance}(Cr.)& 1,500& 1,390& 1,250& 4,140\\ \text{Division of Firm's loss of Rs 4,140 in the}& & & & \\ \text{ratio of 3 : 2 : 1}(Dr.)& \underset{–}{(-)2,070}& \underset{–}{(-)1,380}& \underset{–}{(-)690}& \underset{–}{}\\ & (Dr.)570& (Cr.)10& (Cr.)560& \end{array}$

Adjusting Entry:-

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Dr. Rs}& \text{Cr. Rs}\\ 2014& & & & \\ \text{March 31}& \text{Elvin's Capital A/c}Dr.& & 570& \\ & \text{To Monu's Capital A/c}& & & 10\\ & \text{To Ahmed's Capital A/c}& & & 560\\ & \text{(The adjustment on account of the omission of}& & & \\ & \text{the interest on capitals and drawings)}& & & \end{array}$