Ram and Mohan are equal partners, Their capitals are 4,0000 and 78,000 respectively. After the account for the year are prepared it is discovered that interest @ 5% p.a. on capital as provided in the Partnership Deed has not been credited to Capital Accounts before distributionn of profits. If it is decided to make an adjusting entry in the beginning of the next year. Give necessary adjustment entry.

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Solution

Partners Profits to be written back Interest on capital to be provided Adjustments
Ram - 2950 2000 -950
Mohan -2950 3900 +950
As interest on capital is calculated on the opening balance of capital and no information regarding profit credited is given,its not possible to ascertain the opening capital. Hence, we will assume that the capitals of the partners are fixed.
Due to omission of interest on capital, excess profits has been distributed to the partners which needs to be withdrawn.
Interest on capital = (400005% + 780005%)
= 2000 + 3900 = 5900.
This 5900 has been distributed as profits among partners.
So,adjustment entry is as follows:-
Ram's Capital A/c Dr. 950
To Mohan's capital A/c 950
(Being adjustment entry passed)

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Partners	Profits to be written back	Interest on capital to be provided	Adjustments
Ram	- 2950	2000	-950
Mohan	-2950	3900	+950