Question

A, B, and C entered into a partnership on 1st April, 2025 with capitals of ₹ 8,00,000, ₹ 5,00,000 and ₹ 4,00,000 respectively. Each partner is entitled to interest on his capital @ 8% p.a. and charged Interest on Drawings @ 9% p.a.

B is entitled to a salary of ₹ 80,000 p.a. and Ca salary of ₹ 60,000 p.a. They decided to share profits and losses in the ratio of 5 : 3 : 2.

A guaranteed that the firm would earn a profit of ₹ 6,00,000 before allowing interest on capitals and partners’ salaries. The actual profit for the year ending 31st March, 2026 before interest and salaries amounted to ₹ 5,60,000.

A withdrew ₹ 35,000 in the middle of each half year. B withdrew ₹ 20,000 per month from 1st September, 2025, in the beginning of every month.

C has drawn ₹ 15,000 at the end of each alternate month starting from 30th April, 2025.

Pass necessary Journal Entries to record the above transactions on 31st March, 2026.

Hint: Interest on Drawings : A ₹ 3,150; B ₹ 4,200; C ₹ 4,050.

Answer 1

In the Books of the Firm Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2026	A's Capital A/c		40,000
Mar 31	To Profit and Loss A/c			40,000
	(Being the deficiency in guaranteed profit recovered from A as per WN 1)
Mar 31	Profit and Loss A/c		6,00,000
	To Profit and Loss Appropriation A/c			6,00,000
	(Being net profit transferred to Profit & Loss Appropriation Account)
Mar 31	Interest on Capital A/c		1,36,000
	To A's Capital A/c			64,000
	To B's Capital A/c			40,000
	To C's Capital A/c			32,000
	(Being interest on capital allowed @ 8% p.a. to partners)
Mar 31	Profit and Loss Appropriation A/c		1,36,000
	To Interest on Capital A/c			1,36,000
	(Being interest on capital transferred to P&L Appropriation Account)
Mar 31	Partners' Salary A/c		1,40,000
	To B's Capital A/c			80,000
	To C's Capital A/c			60,000
	(Being salary allowed to B and C)
Mar 31	Profit and Loss Appropriation A/c		1,40,000
	To Partners' Salary A/c			1,40,000
	(Being partners' salary transferred to P&L Appropriation Account)
Mar 31	A's Capital A/c		3,15,000
	B's Capital A/c		4,200
	C's Capital A/c		4,050
	To Interest on Drawings A/c			11,400
	(Being interest on drawings charged @ 9% p.a. as per WN 2)
Mar 31	Interest on Drawings A/c		11,400
	To Profit and Loss Appropriation A/c			11,400
	(Being interest on drawings transferred to P&L Appropriation Account)
Mar 31	Profit and Loss Appropriation A/c		3,35,400
	To A's Capital A/c			1,67,700
	To B's Capital A/c			1,00,620
	To C's Capital A/c			67,080
	(Being divisible profit distributed among partners in the ratio of 5 : 3 : 2)

Working Notes:

WN 1: Adjustment for Guaranteed Profit

Guaranteed profit by A to the firm = ₹ 6,00,000

Actual profit earned by the firm = ₹ 5,60,000

Deficiency to be recovered from A = ₹ 6,00,000 - ₹ 5,60,000 = ₹ 40,000

Total Profit transferred to P&L Appropriation A/c = ₹ 5,60,000 + ₹ 40,000 = ₹ 6,00,000

WN 2: Calculation of Interest on Drawings (@ 9% p.a.)

A's Interest: Drew ₹ 35,000 twice (Total = ₹ 70,000) in the middle of each half-year. Average period = 6 months.
\[\text{Interest} = ₹ 70,000 \times \frac{9}{100} \times \frac{6}{12} = {₹ 3,150}\]

B's Interest: Drew ₹ 20,000 per month for 7 months (from Sept 1 to Mar 31, Total = ₹ 1,40,000) at the beginning of each month. Average period = $\frac{7 + 1}{2} = 4\text{ months}$.
$$\text{Interest} = ₹ 1,40,000 \times \frac{9}{100} \times \frac{4}{12} = {₹ 4,200}$$ 

C's Interest: Drew ₹ 15,000 at the end of each alternate month for 6 intervals (Total = ₹ 90,000). Total months of product method = $11 + 9 + 7 + 5 + 3 + 1 = 36\text{ months}$.
$$\text{Interest} = ₹ 15,000 \times \frac{9}{100} \times \frac{36}{12} = {₹ 4,050}$$ 

WN 3: Calculation of Divisible Profit

Total Credits in P&L Appropriation Account = $\text{Net Profit (Guaranteed) } (₹ 6,00,000) + \text{Total Interest on Drawings } (₹ 11,400) = {₹ 6,11,400}$

Total Debits in P&L Appropriation Account = $\text{Interest on Capital } (₹ 1,36,000) + \text{Salaries } (₹ 1,40,000) = {₹ 2,76,000}$

Net Divisible Profit = $₹ 6,11,400 - ₹ 2,76,000 = {₹ 3,35,400}$