Question

Parul and Rajul were partners in a firm, sharing profits and losses in the ratio of 5 : 3. The balance in their fixed capital accounts on 1st April, 2023 were: Parul Rs 6,00,000 and Rajul Rs 8,00,000. The partnership deed provided for allowing interest on capital at 12\% per annum. The net profit of the firm for the year ended 31st March, 2024 was Rs 1,26,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024. Show your working clearly.

Hint:

If the net profit is less than the total amount of appropriations (like Interest on Capital, Salary), the available profit is distributed among the partners in the ratio of the appropriations due to them, unless the partnership deed specifies otherwise (e.g., treat IoC as a charge). When capitals are fixed, appropriations are routed through Current Accounts.

Answer 1

Working Notes:
1. Calculation of Interest on Capital (IoC):
Interest is allowed on Fixed Capitals.
Parul's IoC = Rs 6,00,000 \( \times \) 12% = Rs 72,000
Rajul's IoC = Rs 8,00,000 \( \times \) 12% = Rs 96,000
Total IoC = Rs 72,000 + Rs 96,000 = Rs 1,68,000
2. Check Adequacy of Profits:
Net Profit for the year = Rs 1,26,000
Total Interest on Capital required = Rs 1,68,000
Since Net Profit $<$ Total IoC, the profit is inadequate to pay the full interest.
3. Appropriation of Profit as Interest on Capital:
When profits are insufficient to cover appropriations like IoC (and the deed doesn't specify treatment in case of loss/inadequacy), the available profit is distributed among partners in the ratio of their appropriations (in this case, the ratio of their IoC).
Ratio of IoC = Parul : Rajul = 72,000 : 96,000
Simplifying the ratio by dividing by 24,000: 3 : 4.
Available Profit (Rs 1,26,000) will be distributed as IoC in the ratio 3:4.
Parul's Share of Profit (as IoC) = \( \frac{3}{7} \times 1,26,000 = Rs 54,000 \)
Rajul's Share of Profit (as IoC) = \( \frac{4}{7} \times 1,26,000 = Rs 72,000 \)
Total distributed = Rs 54,000 + Rs 72,000 = Rs 1,26,000.
(Note: Since capitals are fixed, IoC is credited to Partners' Current Accounts).
Profit and Loss Appropriation Account
for the year ended 31st March, 2024
\begin{longtable}{|l|r|l|r|} \hline Dr. & Amount (Rs) & Cr. & Amount (Rs)
\hline \endfirsthead \hline Dr. & Amount (Rs) & Cr. & Amount (Rs)
\hline \endhead \hline \endfoot \hline \endlastfoot To Interest on Capital:* & & By Profit and Loss A/c & 1,26,000
\quad Parul's Current A/c & 54,000 & & (Net Profit)
\quad Rajul's Current A/c & 72,000 & 1,26,000 &
\hline Total & 1,26,000 & Total & 1,26,000
\hline \end{longtable} *Note: Available profit is distributed in the ratio of Interest on Capital (3:4) as profit is insufficient.