Question

Piya and Rosa were partners in a firm sharing profits and losses in the ratio of 3:5. Their fixed capitals were \rupee 10,00,000 and \rupee 6,00,000 respectively. After the accounts for the year were prepared, it was noticed that interest on capital @ 8\% p.a., as provided in the partnership deed, was not credited to the capital accounts of partners before distribution of profits. Pass the necessary adjusting entry. Show your workings clearly.

Hint:

If interest on capital is omitted, an adjustment entry is required by debiting the Profit and Loss Adjustment Account and crediting the partners’ capital accounts.

Answer 1

Workings: Step 1: Calculate interest on capital:
Piya’s interest on capital = \(\rupee 10,00,000 \times 8\% = \rupee 80,000\)
Rosa’s interest on capital = \(\rupee 6,00,000 \times 8\% = \rupee 48,000\)
Step 2: Adjustment for interest on capital:
Total interest on capital = \rupee 80,000 + \rupee 48,000 = \rupee 1,28,000
Since profits were distributed without considering interest on capital, the adjustment must be made. Journal Entry: \begin{center} \begin{tabular}{|l|p{8cm}|r|r|} Date & Particulars & Debit (\rupee) & Credit (\rupee)
31st March, 2023 & Profit and Loss Adjustment A/c & 1,28,000 & --
& To Piya’s Capital A/c & -- & 80,000
& To Rosa’s Capital A/c & -- & 48,000
& \textit{(Interest on capital credited to partners’ capital accounts as per partnership deed)} & &
\end{tabular} \end{center}