Question

Asha, Suman and Verka were partners in a firm; their capitals were ₹ 9,00,000, ₹ 7,00,000 and ₹ 4,00,000, respectively, as of 1st April 2022. Net profit for the year ended 31st March 2023 was ₹ 1,20,000, which was distributed without providing for interest on capital @ 8% p.a. as per the partnership deed.

Pass the necessary adjustment entry.

Hint: Interest on capital is in excess of net profit.

Answer 1

Calculation of Interest on Capital:

	Amount (₹)
Asha: 8% on Rs. 9,00,000	72,000
Suman: 8% on Rs. 7,00,000	56,000
Verka: 8% on Rs. 4,00,000	32,000
Total interest	1,60,000

Since available profit is only ₹ 1,20,000, which is less than interest on capital.

₹ 1,60,000, profit will be distributed in the ratio of interest on capitals, i.e., 72,000 : 56,000 : 32,000 or 9 : 7 : 4.

Table showing adjustment				Amounts (₹)
	Asha	Suman	Verka	Total
Interest on Capital
Division of Rs. 1,20,000 in profit-sharing ratio (9 : 7 : 4)	54,000	42,000	24,000	1,20,000
Less: Profit of Rs. 1,20,000 already distributed equally.	40,000	40,000	40,000	1,20,000
Net Effect	14,000	2,000	16,000
	(Cr)	(Cr)	(Dr)

 

Journal entry
Date	Particulars	L.F	Debit (₹)	Credit (₹)
	Verka’s Capital A/c   ...Dr.		16,000	-
	To Asha’s Capital A/c		-	14,000
	To Suman’s Capital A/c		-	2,000
	(Being an adjustment for omission of interest on capital.)