Question

Neena and Sara were partners in a firm with fixed capitals of ₹ 5,00,000 and ₹ 4,00,000 respectively. It was discovered that interest on capital @ 6% p.a. was credited to the partners for the two years ending 31st March, 2018 and 31st March, 2019 whereas there was no such provision in the partnership deed. Their profit sharing ratio during the last two years was: 2017-18        4 : 5 2018-19        5 : 1

Showing your workings clearly, pass the necessary adjustment entry to rectify the error.

Answer 1

Adjustment Journal Entry
Date	Particulars	L.F.	Dr. Amount (₹)	Cr. Amount (₹)
2019
Mar 31	Sara’s Current A/c   ...Dr.		9,000
	To Neena’s Current A/c			9,000
	(Being the adjustment entry passed to reverse the wrongly allowed interest on capital for the years 2017-18 and 2018-19)

Working note:

Year 2017–18

Interest on Capital wrongly credited

• Neena = ₹ 5,00,000 × 6% = ₹ 30,000
• Sara = ₹ 4,00,000 × 6% = ₹ 24,000

Total interest wrongly credited = ₹ 54,000

Since this interest should not have been allowed, the amount of ₹ 54,000 should have been added back to the profits and shared in the profit-sharing ratio of 4 : 5.

Share of ₹ 54,000:

• Neena = ₹ 54,000 × `4/9` = ₹ 24,000
• Sara = ₹ 54,000 × `5/9` = ₹ 30,000

Net effect for 2017–18:

• Neena received ₹ 30,000 as interest but should have received only ₹ 24,000 as share of profit.
  Excess credit = ₹ 6,000
• Sara received ₹ 24,000 as interest but should have received ₹ 30,000 as share of profit.
  Short credit = ₹ 6,000

Year 2018–19

Interest on Capital wrongly credited

• Neena = ₹ 30,000
• Sara = ₹ 24,000

Total interest wrongly credited = ₹ 54,000

This amount should have been distributed in the profit-sharing ratio of 5 : 1.

Share of ₹ 54,000:

• Neena = ₹ 54,000 × `5/6` = ₹ 45,000
• Sara = ₹ 54,000 × `1/6` = ₹ 9,000

Net effect for 2018–19:

• Neena received ₹ 30,000 as interest but should have received ₹ 45,000 as share of profit.
  Short credit = ₹ 15,000
• Sara received ₹ 24,000 as interest but should have received only ₹ 9,000 as share of profit.
  Excess credit = ₹ 15,000

Net Adjustment

Neena

• Excess credit in 2017–18 = ₹ 6,000
• Short credit in 2018–19 = ₹ 15,000

Overall, Neena is short credited by ₹ 9,000 (₹ 15,000 − ₹ 6,000).

Sara

• Short credit in 2017–18 = ₹ 6,000
• Excess credit in 2018–19 = ₹ 15,000

Overall, Sara is over-credited by ₹ 9,000 (₹ 15,000 − ₹ 6,000).