Question

Simran and Reema are partners sharing profits in the ratio of 3 : 2. Their capitals as on 31st March, 2017 were ₹ 2,00,000 each whereas Current Accounts had balances of ₹ 50,000 and ₹ 25,000 respectively interest is to be allowed @ 5% p.a. on balances in Capital Accounts. The firm earned net profit of ₹ 3,00,000 for the year ended 31st March 2018. Pass the journal entries for interest on capital and distibution of profit. Also prepare Profit and Loss Appropriation Account for the year.

Answer 1

Journal Entry and Profit and Loss Appropriation calculation is calculated below:

Explanation:

Capital of Simran and Reema each = Rs. 2,00,000

Interest on capital at 5% per annum.  

Interest on Simran’s capital

$= 2,00,000 \times \frac {5}{100} = Rs. 10,000$

Similarly, interest on Reema’s capital

$= 2,00,000 \times \frac {5}{100} = Rs. 10,000$

Net profit in the year = Rs. 3,00,000

3,00,000 – Total Interest 20,000 = 2,80,000

This amount is divided in ratio of 3:2

Simran’s share of Profit

$= 2,80,000 \times \frac {3}{5} = Rs. 1,68, 000$

Reema’s share of profit

$= 2,80,000 \times \frac{2}{5} = Rs. 1,12,000$