Aakash and Baadal entered into partnership on 1st October, 2023 with the 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.
Solution and Explanation
Given
- Capitals on 1-10-2023 — Aakash: ₹80,00,000; Baadal: ₹60,00,000.
- Profit sharing ratio = equal (A : B = 1 : 1).
- Interest on capital = 10% p.a.
- Guarantee: Baadal’s share of profit, after charging interest on capital, will not be less than ₹7,00,000 per annum. Any deficiency to be met by Aakash.
- Profit for year ended 31-03-2024 = ₹13,00,000.
Working
Partners started on 1-10-2023 and the year ended on 31-03-2024 → period = 6 months. Interest on capital is for 6 months i.e. $10\%\times\frac{6}{12}=5\%$ of capital.
- Interest to Aakash = $80,00,000\times5\%=₹4,00,000$.
- Interest to Baadal = $60,00,000\times5\%=₹3,00,000$.
- Total interest = ₹4,00,000 + ₹3,00,000 = ₹7,00,000.
Profit available for distribution after interest = Total profit − Total interest = ₹13,00,000 − ₹7,00,000 = ₹6,00,000.
This remaining ₹6,00,000 is shared equally → each gets ₹3,00,000.
Baadal’s total receipts = Interest on capital (₹3,00,000) + his share of remaining profit (₹3,00,000) = ₹6,00,000. But guarantee requires Baadal to get at least ₹7,00,000.
Deficiency = ₹7,00,000 − ₹6,00,000 = ₹1,00,000. This is met by Aakash.
Profit & Loss Appropriation Account for the year ended 31-03-2024
| Dr (Particulars) | ₹ | Cr (Particulars) | ₹ |
|---|---|---|---|
| To Interest on Aakash’s Capital | 4,00,000 | By Profit (Net) | 13,00,000 |
| To Interest on Baadal’s Capital | 3,00,000 | ||
| To Profit transferred to Aakash’s Capital (½ of ₹6,00,000) | 3,00,000 | ||
| To Profit transferred to Baadal’s Capital (½ of ₹6,00,000) | 3,00,000 | ||
| Total | 13,00,000 | Total | 13,00,000 |
Guarantee adjustment (outside P&L Appropriation)
Aakash meets the deficiency of ₹1,00,000 for Baadal. The journal entry is:
Aakash’s Capital A/c Dr. ₹1,00,000 To Baadal’s Capital A/c ₹1,00,000 (Being deficiency on guarantee met by Aakash)
Final effect on partners’ capitals (summary)
- Aakash receives: Interest ₹4,00,000 + Share ₹3,00,000 = ₹7,00,000, less ₹1,00,000 paid to Baadal → Net +₹6,00,000.
- Baadal receives: Interest ₹3,00,000 + Share ₹3,00,000 + Guarantee compensation ₹1,00,000 → Net +₹7,00,000.
Answer
Profit & Loss Appropriation A/c is prepared above. In addition, Aakash’s Capital A/c is debited and Baadal’s Capital A/c credited by ₹1,00,000 to meet the guarantee.
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