Question

(A) Nida and Pia, each doing business as sole proprietors, started a partnership on 1^st April 2023, with capital contributions of ₹ 5,00,000 and ₹ 4,00,000.

Their partnership deed contained the following clauses:

1. Interest on capital to be allowed @ 10% per annum to both the partners.
2. Annual commission of 30,000 to be allowed to Nida.
3. Interest on drawings to be charged @ 4% per annum.
4. The profit-sharing ratio to be 3 : 2.

Nida withdrew 10,000 during the year 2023-24.

The trading profit of the firm for the year ending 31^st March 2024, was 70,640 before considering accrued interest on investments of ₹ 1,600.

Although the accountant had recorded the drawings made by the partners, he distributed the profits before charging interest on drawings from Nida but after considering the following:

• Accrued interest on investments of ₹ 1,600.
• Allowing the appropriations of interest on capital and commission.

You are required to prepare the following for the year 2023-24:

1. Profit and Loss Appropriation Account as prepared by the accountant of the firm.     [5.5]
2. Nida’s Drawings Account.     [2]

(B) At the beginning of the next financial year, the accountant realised his error of not having charged interest on drawings from Nida. He rectified the error by passing a single adjustment entry.     [2.5]

You are required to give the rectified adjustment entry passed by the accountant.

Answer 1

(A) 

Dr.	Profit and Loss Appropriation A/c				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Partner’s Capital A/c			By P&L A/c	70,640	72,240
- Nida	48,160	72,240	Add: Accrued interest on investment	1,600
- Pia	24,080
		72,240			72,240

 

Dr.	Nida’s Drawings A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash A/c	10,000	By Nida’s Capital A/c	10,200
To Interest A/c	200
	10,200		10,200

Working Note:

Interest on Nida’s capital = 50,000

Interest on Pia’s capital = 40,000

Commission to Nida’s = 30,000

Total appropriation

= 50,000 + 40,000 + 30,000

= ₹ 1,20,000 (which is more than available profit)

Hence, profit to be distributed in the ratio of appropriations

Nida:

= 50,000 + 30,000

= 80,000

Pia:

40,000

= 80,000 : 40,000

= 2 : 1

Nida’s Share in profit = `72240 xx 2/3`

= ₹ 48,160

Pia’s Share in profit = `72240 xx1/3`

= ₹ 24,080

(B) Table Showing Adjustment

Particulars	Nida	Pia	Total
Interest on Drawings (Dr.)	200	-	200
(Division of ₹ 200 in 3 : 2) (Cr.)	120	80	200
	Dr. 80	Cr. 80	-

Adjustment Entry

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Nida’s Capital A/c     ...Dr.		80	-
	To Pia’s Capital A/c		-	80
	(Being adjustment entry passed)