Question

Lalan and Balan were partners in a firm sharing profits in the ratio of 3 : 2. Their fixed capitals on 1st April, 2023, were Lalan, ₹ 1,00,000 and Balan, ₹ 2,00,000. They agreed to allow interest on capital @ 12% per annum and to charge on drawings @ 15% per annum. The firm earned a profit, before all the above adjustments, of ₹ 30,000 for the year ended 31st March, 2024. The drawings of Lalan and Balan during the year were ₹ 3,000 and ₹ 5,000, respectively. Showing you calculations clearly, prepare a 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 2024				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 2024				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.

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

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

= ₹ 225

Interest on drawings of Balan = `"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.