Question

Simran and Reema are partners sharing profits in the ratio of 3 : 2. Their capitals as on 31st March, 2018 were ₹ 2,00,000 each whereas Current Accounts had balances of ₹ 50,000 and ₹ 25,000 respectively interest is to be allowed @ 5% p.a. on balances in Capital Accounts. The firm earned net profit of ₹ 3,00,000 for the year ended 31st March 2019.
Pass the Journal entries for interest on capital and distribution of profit. Also prepare Profit and Loss Appropriation Account for the year.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
	Profit & Loss Appropriation A/c	Dr.		20,000
	To Simran’s Current A/c				10,000
	To Reema’s Current A/c				10,000
	(Interest on capital transferred to Profit & Loss Appropriation A/c)
	Profit & Loss Appropriation A/c			2,80,000
	To Simran’s Current A/c				1,68,000
	To Reema’s Current A/c				1,12,000
	(Profit transferred to Partners’ Current A/c)

Profit and Loss Appropriation Account for the year ended 31 March 2019
Dr.				Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
Interest on Capital A/c:			Profit and Loss A/c	3,00,000
Simran	10,000
Reema	10,000	20,000
Profit transferred to:
Simran’s Current A/c	1,68,000
Reema’s Current A/c	1,12,000	2,80,000
		3,00,000		3,00,000

Working Notes:

WN1: Calculation of Interest on Capital

$\begin{array}{l}\text{Simran's\hspace{0.17em}Interest\hspace{0.17em}on\hspace{0.17em}Capital\hspace{0.17em}=\hspace{0.17em}}2\text{,00,000}\times \frac{5}{100}=\text{Rs 10,000}\\ \text{Reema's\hspace{0.17em}Interest\hspace{0.17em}on\hspace{0.17em}Capital\hspace{0.17em}=\hspace{0.17em}}2\text{,00,000}\times \frac{5}{100}=\text{Rs 10,000}\end{array}$