Question

Aakash and Baadal entered into partnership on 1st October 2023 with capitals of Rs 80,00,000 and Rs 60,00,000 respectively. They decided to share profits and losses equally. Partners were entitled to interest on capital @ 10 per annum as per the provisions of the partnership deed. Baadal is given a guarantee that his share of profit, after charging interest on capital, will not be less than Rs 7,00,000 per annum. Any deficiency arising on that account shall be met by Aakash. The profit of the firm for the year ended 31st March 2024 amounted to Rs 13,00,000. 
Prepare Profit and Loss Appropriation Account for the year ended 31st March 2024.

Hint:

When dealing with profit guarantees and the accounting period is less than a full year, prorate the guaranteed amount for the relevant period. Calculate divisible profits after all appropriations (like Interest on Capital). Check if the guaranteed partner's share meets the prorated guarantee; if not, the deficiency is borne by the guaranteeing partner(s).

Answer 1

Profit and Loss Appropriation Account

for the year ended March 31, 2024

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Profit & Loss A/c	13,00,000
Aakash (₹80,00,000 × 10% × 6/12)	4,00,000
Baadal (₹60,00,000 × 10% × 6/12)	3,00,000
Total Interest on Capital	7,00,000
To Profit Transferred to:
Aakash Capital A/c	3,00,000
Baadal Capital A/c	3,00,000
Deficiency Met by Aakash	1,00,000
Transferred to Baadal	1,00,000
Aakash's final balance	3,00,000 – 1,00,000 = 2,00,000
Badal's final Balance	3,00,000 +1,00,000 = 4,00,000
To Profit Transferred to:
Aakash Final Capital A/c	2,00,000
Baadal Final Capital A/c	4,00,000
Total	13,00,000	Total	13,00,000

Explanation and Calculations:

1. Interest on Capital:
   • The partnership was formed on October 1, 2023, and the accounting year ends on March 31, 2024. Therefore, interest is calculated for 6 months (October to March).
   • Aakash: ₹80,00,000 × 10% × (6/12) = ₹4,00,000
   • Baadal: ₹60,00,000 × 10% × (6/12) = ₹3,00,000
2. Divisible Profit:
   • Profit before interest on capital: ₹13,00,000
   • Total interest on capital: ₹7,00,000
   • Divisible profit: ₹13,00,000 - ₹7,00,000 = ₹6,00,000
3. Profit Sharing:
   • As the Profit is shared equally it's been shared in 1:1 ratio so 6,00,000/2
   • Each share will be worth 3,00,000
4. Baadal's Guarantee:
   • Baadal's guaranteed profit: ₹7,00,000
   • Baadal's Actual profit as per calculation: 3,00,000 +3,00,000(I.O.C) =6,00,000
   • Therefore, deficiency: ₹7,00,000 -₹ 6,00,000 = ₹1,00,000
5. Aakash's Contribution:
   • Aakash will cover the entire deficiency of ₹1,00,000. Aakashs' will contribute from her Profit share.
6. Final Profit Distribution:
   • Aakash:
     • Profit Share: ₹3,00,000
     • Deficiency borne: ₹1,00,000
     • Total capital Balance = ₹2,00,000
   • Baadal:
     • Profit Share: ₹3,00,000
     • Deficiency received from Aakash: ₹1,00,000
     • Total capital Balance:₹ 4,00,000