Question

P and Q were partners in a firm sharing profits in 3 : 1 ratio. Their respective fixed capitals were ₹ 10,00,000 and ₹ 6,00,000. The partnership deed provided interest on capital @ 12% p.a. The partnership deed further provided that interest on capital will be allowed fully even if it will result into a loss to the firm. The net profit of the firm for the year ended 31st March, 2018 was ₹ 1,50,000.

Pass necessary journal entries in the books of the firm allowing interest on capital and division of profit/loss among the partners.

Answer 1

Journal Entries for the year ended on 31st March, 2018
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2018
Mar 31	Interest on Capital A/c   ...Dr.		1,92,000
	To P’s Current A/c			1,20,000
	To Q’s Current A/c			72,000
	(Being interest on capital allowed @ 12% p.a. to partners)
Mar 31	Profit and Loss A/c   ...Dr.		1,92,000
	To Interest on Capital A/c			1,92,000
	(Being interest on capital transferred to Profit & Loss Account as a charge)
Mar 31	P’s Current A/c   ...Dr.		31,500
	Q’s Current A/c   ...Dr.		10,500
	To Profit and Loss A/c			42,000

Working note:

Interest on P's Capital: 10,00,000 x 12% = 1,20,000

Interest on Q's Capital: 6,00,000 x 12% = 72,000

Total Interest on Capital: 1,20,000 + 72,000 = 1,92,000

Calculation of Net Loss:

Net Loss = Net Profit − Total Interest on Capital

Net Loss = 1,50,000 − 1,92,000 = 42,000

Distribution of Loss (3 : 1):

P's Share of Loss: `42,000 xx 3/4 = 31,500`

Q's Share of Loss: `42,000 xx 1/4 = 10,500`