Question

Arti and Bina are partners with a profit sharing ratio of 2:1 and capitals of 5,00,000 and 34,00,000 respectively. They are allowed 8% p.a. Interest on capital and are charged 10% p.a. Interest in their drawings. Their drawings during the year were Arti 180,000 and Bina 360,000. Arti's share of net profit as per profit and loss appropriation A/c amounted to 1,00,000. Find Net Profit of the firm be.fore any appropriations ​

Answer 1

Given:

• Arti and Bina are partners in a firm, sharing profits and losses in the ratio 2:1.
• Their capitals were Rs 5,00,000 and Rs 4,00,000 respectively.
• Interest on capital is to be charged at 8% p.a.
• Their drawings during the year amounted to Rs 80,000 and Rs 60,000 respectively.
• Interest on drawings is to be charged at 10% p.a.
• Arti's share of profit as per the Profit & Loss Appropriation Account is Rs 1,00,000.

To find: The net profit of the firm before the appropriations were made.

Answer:

Calculation of interests on capitals:

Interest on capital = Capital × (Rate ÷ 100)

For Arti:

• Interest on capital = Rs 5,00,000 × (8 ÷ 100) = Rs 40,000

For Bina:

• Interest on capital = Rs 4,00,000 × (8 ÷ 100) = Rs 32,000

Interests on capitals are recorded on the debit side of the appropriation account.

Calculation of interest on drawings:

Interest on drawings = Drawings × (Rate ÷ 100)

For Arti:

• Interest on drawings = Rs 80,000 × (10 ÷ 100) = Rs 8,000

For Bina:

• Interest on drawings = Rs 60,000 × (10 ÷ 100) = Rs 6,000

Interests on drawings are recorded on the credit side of the appropriation account.

Calculation of profit [as per the Profit & Loss Appropriation Account]:

As per the question, we're given Arti's share of profit. This indicates that the account was already created and we're to find the profit before the appropriations. For that, we need to find the profit as per the appropriations. To do so, multiply the given partner's share of profit with the reciprocal of his/her share in profit.

Arti's share of profit = Rs 1,00,000

Arti's share in profit = 2/3

Reciprocal = 3/2

Profit = Rs 1,00,000 × 3/2 = Rs 1,50,000

The profit [which is usually determined after the appropriations are made] appears on the debit side of the appropriation account, indicating that the credit side of the account is more.

Calculation of net profit [before the appropriations]:

Both sides, the debit side and the credit side, are to have matching figures after profit/loss is determined. Since we're already given all the appropriations and the profit, we just need to add the side that is complete, to know what the other side is to add up to.

The debit side is complete.

Sum of the debit side = Rs 72,000 + Rs 1,50,000 = Rs 2,22,000

Now that we have all the necessary items on the credit side, we can find out the net profit before the appropriations by deducting the balancing amount with the appropriations on the credit side, since the net profit before appropriations are made appears on the credit side of the appropriation account.

There is only one item on the credit side, which is the interest on drawings.

Net profit before the appropriations = Rs 2,22,000 - Rs 14,000 = Rs 2,08,000

The Profit & Loss Appropriation Account has been attached below for better understanding.