Question

After the accounts of the partnership have been drawn up and the books closed off, it is discovered that interest on capitals @ 8% p.a., as provided in the partnership agreement, has been omitted to be recorded. Their capital accounts at the beginning of the year stood as follows: A ₹ 8,00,000; B ₹ 4,00,000; C ₹ 3,00,000. Their profit-sharing ratio was 2 : 1 : 1. Instead of altering the balance sheet, it is decided to pass the necessary adjusting entry at the beginning of the next year.

You are required to give the necessary journal entry.

Answer 1

Calculation of interest on capital:

Particulars	Amount (₹)
Interest on A’s Capital of 8,00,000 @ 8%	64,000
Interest on B’s Capital of 4,00,000 @ 8%	32,000
Interest on C’s Capital of 3,00,000 @ 8%	24,000
Total Interest to be allowed	1,20,000

This amount of ₹ 1,20,000 is an item of expense for the firm, but this has not been recorded on the debit side of the Profit and Loss Appropriation A/c of the previous year. As such, the profit of the previous year will be reduced by this amount. Hence, this loss of ₹ 1,20,000 will be shared by the partners in their profit-sharing ratio. Therefore, each partner should bear `(1,20,000)/3` = ₹ 40,000 as a loss. This loss should be debited to their respective capital accounts, and interest on capital, which they are entitled to, should be credited to their capital accounts.

Table showing adjustment				Amounts (₹)
	A	B	C	Total
Interest on Capital (Cr.)	64,000	32,000	24,000	1,20,000
Division of Rs 1,20,000 in profit-sharing ratio (2 : 1 : 1)	60,000	30,000	30,000	1,20,000
Difference	4,000 (Cr)	2,000 (Cr)	6,000 (Dr)

A necessary adjustment entry can be passed as follows:

Date	Particulars	L.F	Debit (₹)	Credit (₹)
	C’s Capital A/c   ...Dr.		6,000	-
	To A’s Capital A/c		+	4,000
	To B’s Capital A/c		-	2,000
	(Being an adjustment in respect of interest on capital omitted in the previous year’s accounts.)