Question

Menon and Krishnan started business on 1st January, 2013 with capitals of 40,000 and 30,000. As per partnership agreement, Krishnan is to receive a salary of 400 per month. Interest on capitals is to be allowed at 5% p.a. The profits are to be shared by the partners in the ratio of 3:2. During 2013, the firm made a profit of 23,300 before charging salary and interest on capitals. During the year Menon withdrew 6,000 and Krishnan 4,300 for private purposes. Give journal entries relating to the division of profit and prepare profit and loss appropriation account and capital accounts of the partners

Answer 1

Given:

• Menon and Krishnan were partners in a firm, sharing profits and losses in the ratio 3:2, with capitals Rs 40,000 and Rs 30,000 respectively.
• Krishnan is entitled to a salary of Rs 400 per month.
• Interests on capitals is to be charged at 15% p.a.
• The profit for the year was Rs 23,300.
• Menon withdrew Rs 6,000 and Krishnan withdrew Rs 4,300.

Objective: To create the Profit & Loss Appropriation and Partners' Capital Accounts and pa‎ss the necessary entry for profits.

Answer:

The profit for the year, i.e., Rs 23,300, is to be transferred to the credit side of the appropriation account.

Calculation of interests on capitals:

Interest on capital = Capital × (Rate ÷ 100)

For Menon:

• Interest on capital = Rs 40,000 × (5 ÷ 100) = Rs 2,000

For Krishnan:

• Interest on capital = Rs 30,000 × (5 ÷ 100) = Rs 1,500

The interests on capitals are to be recorded on the debit side of the appropriation account.

Calculation of salaries:

Only Krishnan receives a salary of Rs 400 per month.

Total salary = Rs 400 × 12 = Rs 4,800

Salaries will be recorded on the debit side of the appropriation account.

Calculation of profit/loss:

To determine profit/loss, observe the debit and the credit sides of the account. If the balancing figure appears on the debit side, it is profit. Else, loss.

Debit = Rs 3,500 + Rs 4,800 = Rs 8,300

Credit = Rs 23,300

Balancing figure = Rs 23,300 - Rs 8,300 = Rs 15,000 [Dr.]

Calculation of profit distribution:

Since they share their profits and losses in the ratio 3:2, it will be distributed accordingly.

For Menon:

• Profit share = Rs 15,000 × 3/5 = Rs 9,000

For Krishnan:

• Profit share = Rs 15,000 × 2/5 = Rs 6,000

Journal entry:

Profit & Loss Appropriation A/c ... Dr - Rs 15,000

• To Menon's capital A/c - Rs 9,000
• To Krishnan's capital A/c - Rs 6,000

(Being the profit transferred to the partners' capital accounts.)

The Profit & Loss Appropriation and Partners' Capital Accounts have been attached below.