Question

Shiv and Hari entered into partnership on 1st April, 2015, contributing Rs 5,00,000 and Rs 2,00,000 respectively. Hari also introduced Rs 1,00,000 as additional capital on 1st July, 2015. They agreed to share profits and losses in the ratio of 3:2. The following information is provided regarding the partnership :

(i) Shiv and Hari, each are allowed a salary of Rs 5,000 per quarter.

(ii) Interest is to be allowed on Capitals at 8% p.a. and charged on drawings at 10% p.a.

Drawings of Shiv and Hari during the year were Rs 12,000 and Rs 10,000 respectively. Profit as at 31st March, 2016 before the above mentioned adjustments was Rs 1,96,000.

Prepare :

(i) Necessary journal entries relating to appropriation of profits,

(ii) Profit and Loss Appropriation A/c, and

(iii) Partner's Capital A/cs.

Answer 1

Books of Shiv and Hari
JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& L.F& Dr.\left(Rs\right)& Cr.\left(Rs\right)\\ 2016& & & & \\ \text{March 31}& \text{Profit and Loss A/c}Dr.& & 1,96,000& \\ & \text{To Profit and Loss Appropriation A/c}& & & 1,96,000\\ & \text{(The transfer of Profit to Profit and}& & & \\ & \text{Loss Appropriation Account)}& & & \\ & \underset{–}{}& & & \\ "& \text{Salary A/c}Dr.& & 40,000& \\ & \text{To Shiv's Capital A/c}& & & 20,000\\ & \text{To Hari's Capital A/c}& & & 20,000\\ & \text{(Salary of partners)}& & & \\ & \underset{–}{}& & & \\ "& \text{Profit and Loss Appropriation A/c}Dr.& & 40,000& \\ & \text{To Salary A/c}& & & 40,000\\ & \text{(The transfer of partner's salaries to Profit}& & & \\ & \text{and Loss Appropriation Account)}& & & \\ & \underset{–}{}& & & \\ "& \text{Interest on Capital A/c}Dr.& & 62,000& \\ & \text{To Shiv's Capital A/c}& & & 40,000\\ & \text{To Hari's Capital A/c}& & & 22,000\\ & \text{(Interest on partner's Capitals)}& & & \\ & \underset{–}{}& & & \\ "& \text{Profit and Loss Appropriation A/c}Dr.& & 62,000& \\ & \text{To Interest on Capital A/c}& & & 62,000\\ & \text{(The transfer of interest on Capital to Profit}& & & \\ & \text{and Loss Appropriation Account)}& & & \\ & \underset{–}{}& & & \\ "& \text{Shiv's Capital A/c}Dr.& & 600& \\ & \text{Hari's Capital A/c}Dr.& & 500& \\ & \text{To Interest on Drawings A/c}& & & 1,100\\ & \text{(Interest on partner's drawings)}& & & \\ & \underset{–}{}& & & \\ "& \text{Interest on Drawings A/c}Dr.& & 1,100& \\ & \text{To Profit and Loss Appropriation A/c}& & & 1,100\\ & \text{(The transfer of interest on drawings to Profit}& & & \\ & \text{and Loss Appropriation Account)}& & & \\ & \underset{–}{}& & & \\ "& \text{Profit and Loss Appropriation A/c}Dr.& & 95,100& \\ & \text{To Shiv's Capital A/c}& & & 57,060\\ & \text{To Hari's Capital A/c}& & & 38,040\\ & \text{(The transfer of credit balance of Profit and}& & & \\ & \text{Loss Appropriation Account to partner's Capital}& & & \\ & \text{Accounts)}& & & \end{array}$

PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2016 Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Salary}:& & \text{Profit \& Loss A/c}& \\ \text{Shiv}20,000& & -\text{being profit}& 1,96,000\\ \text{Hari}\underset{–}{20,000}& 40,000& \text{Interest on Drawings :(note 2)}& \\ \text{Interest on Capitals:(note 1)}& & \text{Shiv}600& \\ \text{Shiv}40,000& & \text{Hari}\underset{–}{500}& 1,100\\ \text{Hari}\underset{–}{22,000}& 62,000& & \\ \text{Profit transferred to:}& & & \\ \text{Shiv's Capital A/c}57,060& & & \\ \text{Hari's Capital A/c}\underset{–}{38,040}& 95,100& & \\ & \underset{–}{\overline{1,97,100}}& & \underset{–}{\overline{1,97,100}}\end{array}$

Dr. PARTNER'S CAPITAL ACCOUNTS Cr.

$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{Shiv (Rs.)}& \text{Hari (Rs.)}& \text{Date}& \text{Particulars}& \text{Shiv (Rs.)}& \text{Hari (Rs.)}\\ 2016& & & & 2015& & & \\ \text{March 31}& \text{Drawings}& 12,000& 10,000& \text{April 1}& \text{Bank}& 5,00,000& 2,00,000\\ \text{March 31}& \text{Interest on}& & & \text{July 1}& \text{Bank}& -& 1,00,000\\ & \text{Drawings}& 600& 500& 2016& & & \\ \text{March 31}& \text{Balance}& & & \text{March 31}& \text{Salary}& 20,000& 20,000\\ & c/d& 6,04,460& 3,69,540& \text{March 31}& \text{Interest}& & \\ & & & & & \text{on}& & \\ & & & & & \text{Capitals}& 40,000& 22,000\\ & & & & \text{March 31}& \text{Profit \&}& & \\ & & & & & \text{Loss}& & \\ & & & & & \text{Appropri-}& & \\ & & & & & \text{ation A/c}& 57,060& 38,040\\ & & \underset{–}{\overline{6,17,060}}& \underset{–}{\overline{3,80,040}}& & & \underset{–}{\overline{6,17,060}}& \underset{–}{\overline{3,80,040}}\end{array}$

Note (1): Calculation of Interest on Capitals Rs

$\begin{array}{ccc}\text{Shiv}& \text{On Rs 5,00,000 at 8\% for 1 year}& \underset{–}{40,000}\\ \text{Hari}& \text{On Rs 2,00,000 at 8\% for 1 year}& 16,000\\ & \text{On Rs 1,00,000 at 8\% for 9 moths}& 6,000\\ & & \underset{–}{\overline{22,000}}\end{array}$

Interest on Capitals is recorded on the debit side of P & L Appropriation A/c, as it is an item of expense for the firm. Interest on Capital is also recorded on the credit side of Capital Accounts, as it increases the Capitals.

Note(2) : In this question, the dates of drawings are not given, therefore, interest on drawings has been calculated for six months.

Hence, Interest on Shiv's drawings $=12,000\times \frac{10}{100}\times \frac{6}{12}=Rs600$

Interest on Hari's drawings $=10,000\times \frac{10}{100}\times \frac{6}{12}=Rs500$

Interest on Drawings is recorded on the credit side of P & L Appropriation A/c, as it is an item of income for the firm. Interest on Drawings is also recorded on the debit side of Capital Accounts, as it reduces the Capitals.