Agni, Jal and Pawan are partners in a firm. According to the Partnership Deed, the partners are entitled todraw * 3,500 per month. On the 1st day of every month, Agni, Jal and Pawan draw 3,500;* 3,000 and*2,500 respectively. Interest on capitals and interest on drawings are fixed @ 8% and 10% respectivelyNet Profit during the year ended 31st March, 2021 was 3,77,500, out of which a sum of 1,00,000is to be transferred to General Reserve. Jal and Pawan are entitled to salary of 15,000 p.a. and22,500 p.a. respectively and Agni is entitled to commission @ 10% on the net distributable profitafter charging such commission. On 1st April, 2020, the balances of their Capital Accounts were*2,50,000; * 2,00,000 and 7 1,75,000 respectively. Prepare Profit and Loss Appropriation Accountfor the year ended 31st March, 2021 and the Capital Accounts of Partners in the books of the firm.
Answers
Given data:
- Balances of Agni, Jal and Pawan were Rs 2,50,000, Rs 2,00,000 and Rs 1,75,000 respectively.
- Interest on capital and interest on drawings were to be charged at 8% and 10% respectively.
- Drawings were made on the 1st of every month being Rs 3,500, Rs 3,000 and Rs 2,500 respectively.
- Salaries to Jal and Pawan were Rs 15,000 and Rs 22,500 respectively.
- Agni was entitled to a commission of 10% on net distributable profit after charging commission.
- The net profit during the year was Rs 3,77,500.
- General reserve was Rs 1,00,000.
To prepare: Profit and Loss Appropriation A/c and Capital A/c.
Answer:
Calculation of interest on drawings:
Since the interest on drawings were made on the 1st of every month [beginning of every month], the formula to calculate the interest on drawings is as below:
Interest on drawings = (Total drawings for the year × Rate × 6.5)/100 × 12
For Agni:
- Interest on drawings = ({Rs 3,500 × 12} × 10 × 6.5)/100 × 12 = Rs 2,275
For Jal:
- Interest on drawings = ({Rs 3,000 × 12} × 10 × 6.5)/100 × 12 = Rs 1,950
For Pawan:
- Interest on drawings = ({Rs 2,500 × 12} × 10 × 6.5)/100 × 12 = Rs 1,625
Calculation of interest on capital:
The formula to calculate the interest on capital is as below:
Interest on capital = Capital × Rate
For Agni:
- Interest on capital = (Rs 2,50,000 × 8)/100 = Rs 20,000
For Jal:
- Interest on capital = (Rs 2,00,000 × 8)/100 = Rs 16,000
For Pawan:
- Interest on capital = (Rs 1,75,000 × 8)/100 = Rs 14,000
Calculation of commission:
To calculate the commission on divisible profit, subtract the total of the debit side items from the total of the credit side items. Multiply the resultant value by the rate and divide it by (100 + Rate) since it has been specified that it is after charging a commission. If it was before, simply divide the resultant value by 100 instead.
Total of the debit side items = Rs 20,000 + Rs 16,000 + Rs 14,000 + Rs 1,00,000 + Rs 15,000 + Rs 22,500 = Rs 1,87,500.
Total of the credit side items = Rs 3,77,500 + Rs 2,275 + Rs 1,950 + Rs 1,625 = Rs 3,83,350
Difference = Rs 3,83,350 - Rs 1,87,500 = Rs 1,95,850
Commission = (Rs 1,95,850 × 10)/100 + 10
Commission = Rs 19,58,500/110
Commission = Rs 17805 [approx.]
Calculation of profit shares:
Since no profit/loss-sharing ratio has been mentioned in the question, it is assumed that the profits/losses are shared equally. Since there are 3 partners here, divide the profit by 3.
NOTE: Necessary adjustments were made due to the avoidance of decimal values.
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Rs Particulars Rs
To, General Reserve A/c 200000 By Profit and loss A/c (Net Profit) 755000
To, Interest on Capital A/c
A ( 500000*8%) 40000
B ( 400000*8%) 32000
C ( 350000*8%) 28000
100000 By Interest on Drawing A/cs (WN 1)
A (84000*10%*6.5/12) 4,550
B (72000*10%*6.5/12) 3,900
C (60000*105*6.5/12) 3,250
11,700
To, Partners Salary A/c
B 30000
C 45000
75000
To, A's Commission A/c (WN 3) 35,609
To, Profit transferred to:
A's Capital A/c 1,18,697
B's Capital A/c 1,18,697
C's Capital A/c 1,18,697
3,56,091
7,66,700 7,66,700
PARTNERS CAPITAL ACCOUNT
Particulars A B C Particulars A B C
To, Drawings A/c 84,000 72000 60000 By, Balance b/d 500000 400000 350000
To, Interest on Drawings A/c 4,550 3,900 3,250 By, Interest on capital A/c 40000 32000 28000
To, Balance c/d 6,05,756 4,74,797 4,78,447 By, Partners Salary A/c _ 30000 45,000
By, A's Commission A/c 35,609 _ _
By, Profit and loss Appropriation A/c 118697 118697 118697
Total 6,94,306 5,50,697 5,41,697 Total 6,94,306 5,50,697 5,41,697