Question

X and Y are partners sharing the profits and losses in the ratio of 2 : 1 with capitals of ₹ 50,000 and ₹ 30,000, respectively. Show the distribution of profits in each of the following alternative cases:

1. If the partnership deed is silent as to the interest on capital and the profits for the year are ₹ 9,000.
2. If the partnership deed provides for interest on capital @ 6% p.a. and the losses for the year are ₹ 6,000.
3. If the partnership deed provides for interest on capital @ 6% p.a. and the profits for the year are ₹ 9,000.
4. If the partnership deed provides for interest on capital @ 6% p.a. and the profits for the year are ₹ 3,000.
5. If the partnership deed provides for interest on capital @ 6% p.a., even if it involves the firm in loss and the profits for the year are ₹ 3,000.

Answer 1

(i) As the partnership deed is silent as to the interest on capital, the interest on capital will be governed by the provisions of the Indian Partnership Act, 1932. The Act states that no interest shall be allowed on partners’ capitals.

Dr.	Profit and Loss Appropriation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Profit transferred to:		9,000	By Profit and Loss A/c (Profit for the year)		9,000
X’s Capital A/c `(2/3)`	6,000
Y’s Capital A/c `(1/3)`	3,000
		9,000			9,000

(ii) As per the provisions of the Indian Partnership Act, 1932, no interest on partners' capitals is to be allowed in case of losses.

Dr.	Profit and Loss Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Balance b/d (Loss for the year)		6,000	By loss transferred to:		6,000
			X’s Capital A/c (2/3)	4,000
			Y’s Capital A/c (1/3)	2,000
		6,000			6,000

(iii)

Dr.	Profit and Loss Appropriation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital:		4,800	By Profit and Loss A/c (Profit for the year)		9,000
X	3,000
Y	1,800
To Profit transferred to:		4,200
X's Capital A/c (2/3)	2,800
Y's Capital A/c (1/3)	1,400
		9,000			9,000

(iv) The available profit is ₹ 3,000, whereas the interest due on capitals is ₹ 4,800 (3,000 + 1,800). Since the profit is less than the interest, the available profit will be distributed in the ratio of interest, i.e., 3,000 : 1,800 or 5 : 3.

Dr.	Profit and Loss Appropriation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital:		3,000	By Profit and Loss A/c (Profit for the year)		3,000
X	1,875
Y	1,125
		3,000			3,000

(v) Interest on capital will be allowed even if the firm incurs a loss. It means interest on capital is a charge against profit. As such, it would be debited to profit and loss and not to the profit and loss appropriation account.

Dr.	Profit and Loss Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital:		4,800	By Balance b/d (Profit for the year)		3,000
X	3,000		By loss transferred to:		1,800
Y	1,800		X's Capital A/c `(2/3)`	1,200
			Y's Capital A/c `(1/3)`	600
		4,800			4,800