Question

On 1st April, 2020 A and B enter into partnership contributing Rs 40,000 and Rs 30,000 respectively and sharing profit and losses equally. Interest on capital is to be allowed at 12% per annum. During the year A withdrew Rs 10,000 and B Rs 15,000. Interest charged on drawings was: A Rs 1,000 and B rs 1,500. Profits aat the end of the year 31st March 2021 before making any of the above adjustments was Rs 34,000. Prepare profit and loss Appropriation account for the year ending 31st march 2021 and the capital account assuming that capitals are fluctuating.

Answer 1

Given data:

• A and B are partners in a firm sharing profits and losses equally, with capitals Rs 40,000 and Rs 30,000 respectively.
• Interest on capital is to be charged at 12% p.a.
• A withdrew Rs 10,000 and B withdrew Rs 15,000 during the year.
• Interest on drawings was charged for A and B at Rs 1,000 and Rs 1,500 respectively.
• The profit for the year was Rs 34,000.

Objective: To prepare a Profit & Loss Appropriation Account and Partners' Capital Accounts.

Answer:

Calculation of interest on capitals:

Interest on capital = (Capital × Rate) ÷ 100

For A:

• Interest on capital = (Rs 40,000 × 12) ÷ 100 = Rs 4,800

For B:

• Interest on capital = (Rs 30,000 × 12) ÷ 100 = Rs 3,600

The profit [Rs 34,000] and interest on drawings [Rs 1,000 & Rs 1,500] are to be shown on the credit side of the appropriation account.

The interest on capital [Rs 4,800 & Rs 3,600 as calculated above] is to be shown on the debit side of the appropriation account.

Once all accounts have been posted, we check for the balancing figure. If the balancing figure appears on the debit side, the firm earns a profit. Else, loss.

Calculation of profit/loss:

Total of the credit side = Rs 34,000 + Rs 2,500 = Rs 36,500

Total of the debit side = Rs 8,400

Since the credit side is more, the balancing figure will appear on the debit side, indicating a profit.

Profit = Credit - Debit = Rs 36,500 - Rs 8,400 = Rs 28,100

Calculation of profit shares:

Since they share profits and losses equally, the profit will need to be distributed accordingly, i.e., in the ratio 1:1.

For A:

• Profit share = Rs 28,100 × 1/2 = Rs 14,050

For B:

• Profit share = Rs 28,100 × 1/2 = Rs 14,050

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