Question

Lalan and Balan were partners in a firm sharing profits in the ratio of 3 : 2. Their fixed capitals on 1.4.2010 were : Lalan Rs 1,00,000 and Balan Rs 2,00,000. They agreed to allow interest on capital @ 12% per annum and to charge on drawing @ 15% per annum. The firm earned a profit, before all the above adjustments, of Rs 30,000 of the year ended 31.3.2011. The drawings before Lalan and Balan during the year were Rs 3,000 and Rs 5,000, respectively. Showing your calculations, clearly prepare the Profit and Loss Appropriation Account of Lalan and Balan. The interest on capital will be allowed even if the firm incurs a loss.

Answer 1

Dr.	Profit and Loss Account  for the year ended 31st March 2011				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital:		36,000	By Balance b/d (Profit before interest)		30,000
Lalan	12,000		By Profit and Loss Appropriation A/c (loss transferred)		6,000
Balan	24,000
		36,000			36,000

 

Dr.	Profit and Loss Appropriation Account  for the year ended 31st March 2011				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
By Profit and Loss A/c (Loss for the year)		6,000	By interest on drawings:		600
			Lalan’s Current A/c	225
			Balan’s Current A/c	375
			By Net Loss transferred to:		5,400
			Lalan’s Current A/c	3,240
			Balan’s Current A/c	2,160
		6,000			6,000

Working Notes:

1. Calculation of interest on drawings:

As the time period of drawings is not given, the interest on drawings will be charged for 6 months.

Lalan

Interest on drawings = `"Total drawings" xx "Rate"/100 xx "Average period"/12`

= `3,000 xx 15/100 xx 6/12`

= 225

Balan

Interest on drawings = `"Total drawings" xx "Rate"/100 xx "Average period"/12`

= `5,000 xx 15/100 xx 6/12`

= 375

2. In this question, interest on capital is to be allowed even if the firm incurs a loss. It means interest on capital is a charge against profit. As such, it should be debited to profit and loss and not to the profit and loss appropriation account.