Question

Ram and Mohan were partners in a firm sharing profits in 3 : 2 ratio. Their fixedcapitals were: Ram Rs.120000 and Mohan Rs. 90,000. For the year 1999.interest on capitalwas credited to them C 6% instead 5%. Give necessary adjusting entry for the rectificationof the error. Show also the working notes clearly​

Answer 1

Given:

• Ram and Mohan are partners in a firm sharing profits and losses in the ratio 3:2.
• Their fixed capitals are Rs 1,20,000 and Rs 90,000 respectively.
• For the year ended 1999, interest on capital was credited to them at 6% p.a. instead of 5% p.a.

Objective: To rectify the error and pa‎ss the necessary journal entry.

Answer:

Calculation of interest on capital [wrong amount]:

Interest on capital = (Capital × Rate)/100

For Ram:

• Interest on capital = (Rs 1,20,000 × 6)/100 = Rs 7,200

For Mohan:

• Interest on capital = (Rs 90,000 × 6)/100 = Rs 5,400

Calculation of interest on capital [right amount]:

Interest on capital = (Capital × Rate)/100

For Ram:

• Interest on capital = (Rs 1,20,000 × 5)/100 = Rs 6,000

For Mohan:

• Interest on capital = (Rs 90,000 × 5)/100 = Rs 4,500

Calculation of profit:

To calculate the profit/loss, observe which side of the firm has a higher amount and subtract the one with the lesser amount from it. If the resultant value is on the debit side, it is profit. Else, loss.

Cr = Rs 12,600

Dr = Rs 10,500

Since the credit side is more, the resultant value of their difference will appear on the debit side, i.e., profit.

Profit = Rs 12,600 - Rs 10,500 = Rs 2,100

Calculation of profit shares:

Since the profits are shared in the ratio 3:2, they must be distributed accordingly.

For Ram:

• Profit share = Rs 2,100 × 3/5 = Rs  1,260

For Mohan:

• Profit share = Rs 2,100 × 2/5 = Rs 840

Rectifying entry:

Mohan's current account ... Dr - Rs 60

• To Ram's current account - Rs 60