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Question

P and Q were partners in a firm sharing profits and losses equally. Their fixed capitals were Rs. 3,00,000 each respectively. The Partnership Deed provided for interest on capital @ 12% per annum. For the year ended 31st March, 2016, the profits of the firm were distributed without providing interest on capital. Pass necessary adjustment entry to rectify the error.

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Solution

If the partnership deed provides for the payment of interest on capital,then it should be paid to the partners in case of profits.
P and Q are entitled to interest on their capital contribution @ 12% per annum.
The adjustment entry should be:-
Profit and Loss Appropriation A/c Dr 72,000
To P's Current A/c 36,000
To Q's Current A/c , 36,000
(Being the interest on capital paid to P and Q @12%p.a)

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