Question

A, B and C were partners. Their capitals were A ₹ 30,000; B ₹ 20,000 and C ₹ 10,000 respectively. According to the Partnership Deed, they were entitled to an interest on capital @ 5% p.a. In addition, B was also entitled to draw a salary of ₹ 500 per month. C was entitled to a commission of 5% on the profits after charging the interest on capital, but before charging the salary payable to B. The net profit for the year were ₹ 30,000 distributed in the ratio of capitals without providing for any of the above adjustments. The profits were to be shared in the ratio of 5 : 3 : 2.
Pass necessary adjustment entry showing the workings clearly.

Answer 1

The necessary adjustment entry are calculated below:

Explanation:

Given,

A, B and C capitals were A ₹ 30,000; B ₹ 20,000 and C ₹ 10,000 respectively.

The profits were to be shared in the ratio of 5 : 3 : 2.

Calculation of Interest on Capital

Interest on A's Capital

$=30,000 \times \frac{5}{100}=1,500$

Interest on B's Capital

$=20,000 \times \frac{5}{100}=1,000$

Interest on C's Capital

$=10,000 \times \frac{5}{100}=500$

Salary to B

$=500 \times 12=6,000$

Calculation of Commission to C

Commission to C = 5% on Profit after interest on capital but before salary

Profit after Interest on Capital but before Salary

$=\mathrm{Rs} .30,000-\mathrm{Rs} .3,000=\mathrm{Rs} .27,000$

Therefore C's Commission

$=27,000 \times \frac{5}{100}=1,350$

Calculation of Share of Profit of each Partner

Profit available for Distribution

$=\mathrm{Rs} .30,000-\mathrm{Rs} .3,000-\mathrm{Rs} .6,000-\mathrm{Rs} .1,350=\mathrm{Rs} .19,650$

A's Profit Share

$=19,650 \times \frac{5}{10}=9,825$

B's Profit Share

$=19,650 \times \frac{3}{10}=5,895$

C's Profit Share

$=19,650 \times \frac{2}{10}=3,930$

Thus, as per the adjustment calculation, an amount of Rs. 3675 has been debited from A's account and an amount of Rs. 2895 and Rs. 780 has been credited to B and C's account respectively.