Ncert Solutions for Class 12 Accountancy Chapter 1 Accounting for Partnership : Basic Concepts

Class 12 accountancy chapter 1 exercise solutions: Accountancy Class 12 Chapter 1 questions and answers

Textbook	NCERT
Class	Class 12
Subject	Accountancy
Chapter	Chapter 1
Chapter Name	Accounting for Partnership basic concepts class 12 ncert solutions
Category	Ncert Solutions
Medium	English

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Short Answer Questions

Question 1: Define Partnership Deed

Answer 1: A Partnership Deed is a legal document that formalizes the terms and conditions agreed upon by the partners of a partnership firm. It serves as a written agreement detailing the rights, responsibilities, profit-sharing ratios, and other obligations of each partner in the business. This document ensures clarity, minimizes disputes, and provides a framework for the smooth operation of the partnership.

Question 2: Why is it considered desirable to make the partnership agreement in writing?

Answer 2: As per the Partnership Act, 1932, it is not mandatory for a partnership agreement to be in writing; however, it is highly desirable to have it documented. A written partnership agreement serves as concrete evidence of the terms and conditions agreed upon by the partners.

While relationships among partners may be amicable initially, future disputes or misunderstandings can arise over issues like profit-sharing, responsibilities, or decision-making. In such situations, a written agreement provides clarity, prevents conflicts, and ensures smooth resolution. It safeguards the interests of all partners by clearly defining their roles, rights, and obligations, fostering trust and transparency in the partnership.

Question 3: List the items which may be debited or credited in capital accounts of the partners when:
(i) Capitals are fixed.
(ii) Capital are fluctuating

Answer 3: (i) Capitals are fixed:

Items credited	Items Debited
Opening balance of capital	Closing balance of capital
Fresh capital introduced during an accounting year	Permanent withdrawal of capital

(ii)Capitals are fluctuating:

Items Credited	Items Debited
Opening balance of capital	Closing balance of capital
Fresh capital introduced during an accounting year	Drawings
Salaries	Interest on drawings
Interest on capital	Profit and loss A/c
Share of profit	Share of loss
Commission and bonus to the partners

Question 4: Why is Profit and Loss Appropriation Account prepared?

Answer 4: The Profit and Loss Appropriation Account is prepared to allocate the net profit or loss of the partnership firm to various accounts, such as the partners’ capital accounts, reserves, or other appropriations.

It is used to determine how the profit will be shared among the partners based on the agreed terms, such as profit-sharing ratio, interest on capital, salaries, and other adjustments. This account ensures transparency and proper allocation of earnings in accordance with the partnership agreement.

Question 5: Give two circumstances under which the fixed capitals of partners may change.

Answer 5: The following are the two circumstances under which the fixed capitals of partner may change.

(i) If any additional capital is introduced by the partner during the year.

(ii) If any part of capital is permanently withdrawn by the partner from the firm.

Question 6: If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

Answer 6: When there is a withdrawal of money on the first day of each quarter, then the corresponding interest is calculated for a period of seven and half months on the total amount that is withdrawn.

Question 7: In the absence of Partnership deed, specify the rules relating to the following :
(i) Sharing of profits and losses.
(ii) Interest on partner’s capital.
(iii) Interest on Partner’s drawings.
(iv) Interest on Partner’s loan
(v) Salary to a partner.

Answer 7:

(i) Sharing of profits and losses: In the absence of a partnership deed, profits and losses are shared equally among all partners, regardless of their capital contribution.
(ii) Interest on partner’s capital: No interest is allowed on partners’ capital, unless there is an express agreement providing for it.
(iii) Interest on Partner’s drawings: No interest is charged on partners’ drawings, as there is no provision for this in the absence of an agreement.
(iv) Interest on Partner’s loan: A partner is entitled to interest at the rate of 6% per annum on any loan or advance given to the firm. This is payable even if the firm incurs a loss.
(v) Salary to a partner: No salary or remuneration is allowed to any partner for their participation in the business unless specifically agreed upon.

Long Answer Questions

Question 1: What is meant by partnership? Explain its chief characteristics? Explain.

Answer 1: A partnership is a legal relationship between two or more individuals or entities who come together to carry on a business with a common goal of earning profits. The partners share the profits, losses, and responsibilities of the business according to the terms agreed upon in the partnership agreement or, in the absence of such an agreement, according to the provisions of the Partnership Act, 1932 (in India).

Chief Characteristics of Partnership

1. Two or More Partners A partnership must have at least two partners, and there is no limit to the maximum number of partners in the firm, except in certain industries where regulations may apply.
2. Agreement A partnership is based on an agreement between the partners. This agreement can be either written or oral. In the absence of a partnership deed, the provisions of the Partnership Act, 1932 will govern the partnership.
3. Mutual Agency Every partner is both an agent and a principal. This means that each partner can act on behalf of the firm and bind other partners in business transactions, and at the same time, each partner is liable for the actions of the other partners within the scope of the partnership business.
4. Sharing of Profits and Losses The partners agree to share the profits and losses of the business in a predetermined ratio, which may be equal or based on capital contribution or another arrangement stated in the partnership deed.
5. Unlimited Liability Partners have unlimited liability for the debts of the firm. If the business assets are insufficient to cover the liabilities, the personal assets of the partners can be used to pay off the firm’s debts.
6. Voluntary Relationship A partnership is a voluntary relationship. The partners can join or leave the partnership by mutual consent, subject to the partnership agreement.
7. Business Activity A partnership is formed to carry on a business, and it must be for a lawful purpose. The firm can engage in any legitimate business activity with the aim of earning profits.
8. Lack of Legal Status A partnership is not considered a separate legal entity (except in some cases, like limited liability partnerships or LLPs). It does not have a distinct legal personality separate from its partners.

Question 2: Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed

Answer 2: As per the Indian Partnership Act 1932, the following provisions stay relevant when a partnership deed is not present:

1. Sharing of profits and losses: If a partnership deed is absent, then the profit-sharing ratio should be equal among all partners, as per Partnership Act, 1932.

2. Interest on partner’s capital: If the partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.

3. Interest on partner’s drawings: If the partnership deed is absent, then as per Partnership Act, 1932, no interest shall be charged to the partners in the event of drawing money.

4. Interest on partner’s loan: If the partnership deed is absent, then the partner is eligible for a 6% interest on the loan to the firm.

5. Salary to a partner: In case of the absence of a partnership deed, the partners are not eligible for any salary; any salary whatsoever, if paid, will be as appropriation of profit (in case there is profit).

Question 3: Explain why it is considered better to make a partnership agreement in writing.

Answer 3: As per Partnership Act. 1932, it is not necessary that a partnership agreement must be in writing but still it is always suggested that it should be in written form. Because today there are very good relationship among the partners but in future there may be any dispute regarding any Issue a written partnership agreement will help in avoiding dusputes and misunderstandings among the partners.

In this way a written partnership deed is more desirable than an oral agreement. A written partnership agreement ensures seamless functioning of the business of the partnership firm. It also helps in settling the disputes among the partners. Moreover, a duly signed and registered partnership deed works as an evidence in the court of law. Therefore, it is suggested to have a partnership deed in writing because of the benefits associated with written documents over its oral counterparts.

Question 4: Illustrate how interest on drawings will be calculated under various situations.

Answer 4: Interest on drawings is calculated when a partner or proprietor withdraws money or goods for personal use from the business. The calculation depends on the timing, frequency, and amount of the withdrawals. Here’s an illustration of how interest on drawings is calculated under different situations:

1. When Drawings Are Made at the Beginning of the Month

• Formula:
  Interest on Drawings = Total Drawings × Rate of Interest × \(\frac{\text{Months Left in the Year}}{12} \)
• Example:
  If a partner withdraws $10,000 at the beginning of each month and the interest rate is 10% p.a., for a year:
  Interest for January = 10,000 × 10% × \(\frac{12}{12}\) = 1,000
  Interest for February = 10,000 × 10% × \(\frac{11}{12}\) = 916.67…and so on.
• Total Interest: Calculate the sum of interest for each month.

2. When Drawings Are Made at the End of the Month

• Formula:
  Interest on Drawings = Total Drawings × Rate of Interest × \(\frac{\text{Months Passed in the Year}}{12} \)
• Example:
  If $10,000 is withdrawn at the end of each month, the first withdrawal (January) will accrue interest for 11 months, the second (February) for 10 months, and so on.

3. When Drawings Are Made in the Middle of the Month

• Formula:
  Assume an average time period of 6 months:
  Interest on Drawings = Total Drawings × Rate of Interest × \(\frac{6}{12} \)
• Example:
  If $60,000 is withdrawn in equal monthly installments of $5,000 on the 15th of each month at 10% p.a.:
  Interest = 60,000 × 10% × \(\frac{6}{12} = 3,000\)

4. When Drawings Are Made Irregularly

• Formula: Calculate interest individually for each withdrawal based on the time left in the year.
• Example:
  A partner withdraws:
• $5,000 on March 1 (10 months left):
  5,000 × 10% × \(\frac{10}{12}\) = 416.67
• $8,000 on July 1 (6 months left):
  8,000 × 10% × \(\frac{6}{12}\) = 400
• $4,000 on November 1 (2 months left):
  4,000 × 10% × \(\frac{2}{12}\) = 66.67
• Total Interest: 416.67 + 400 + 66.67 = 883.34

5. When a Fixed Amount Is Withdrawn Regularly

• Short Method: Use the average period method.
  Assume an average time of 6.5 months for regular monthly drawings:
  Interest = Total Drawings × Rate of Interest × \(\frac{6.5}{12}\)
• Example:
  Monthly withdrawal: $5,000, Total withdrawals: $60,000, Rate: 10% p.a.:
  Interest = 60,000 × 10% × \(\frac{6.5}{12}\) = 3,250

Conclusion

The method used to calculate interest on drawings depends on the withdrawal pattern. If the withdrawals are:

• Regular: Use average time methods for simplicity.
• Irregular: Calculate interest individually for each transaction.

Question 5: How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.

Answer 5: Usually due to the admission, retirement or death of a partner or sometimes due to the general agreement among the partners, they may decide to change the profit sharing ratio. Various adjustments that should be considered during the change in the profit sharing ratio are , goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capitals, etc. The general reserves and accumulated profits (if any) and profit (or loss) on revaluation on assets and liabilities should be credited (debited) in the Partner’s Capital Account in their old profit sharing ratio.

But if the existing partners decide to change the profit sharing ratio then some partners gain (gaining partners) at the cost of other partners (sacrificing partners). Thus, the former should compensate the latter. Therefore, the gaining Partners’ Capital Account s are debited to the extent of their gain and sacrificing Partners’ Capital Accounts are credited to extent of their sacrifice. The following Journal entry is passed.

Gaining Partner’s Capital A/c  Dr. 
        To Sacrificing Partner’s Capital A/c
(Adjustment entry passed)

Example:

A, B, C are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm shows Rs 1,20,000 as general reserve, profit due to revaluation of building Rs 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

Particulars	A	B	C
Share of profit as per 3:2:1	60,000	40,000	20,000
Profit on revaluation of building	15,000	10,000	5,000
	75,000	50,000	25,000
Share of profit as per 1:1:1	50,000	50,000	5,000
Difference (Gain or Loss)	25,000 (Loss)	–	25,000 (Gain)

Hence, in this example, C gains at the cost of A, so the partner A needs to be compensated by C with the amount of Rs 25,000. The following adjustment entry is passed.

Adjustment entry:

C’s Capital A/c    Dr.      25000
   To A’s Capital A/c                         25000
(Adjustment entry passed)

Numerical Questions

Question 1: Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs.60,000 and Rs.40,000 as on April 01, 2019. During the year they earned a profit of Rs. 30,000. According to the partnership deed both the partners are entitled to Rs. 1,000 per month as salary and 5% p.a. interest on their capital. They are also to be charged an interest of 5% p.a. on their drawings, irrespective of the period, which is Rs. 12,000 for Tripathi, Rs. 8,000 for Chauhan. Prepare Partner’s capital/current accounts when, capitals are fixed.

Answer 1: a) If interest on Capital and Partners’ salaries and interest on drawings is charged against profit, the solution will be as:

Dr.	Profit and Loss Appropriation Account		Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
Profit transferred to		Profit and Loss	30,000
Triphati’s Current Account	18,000
Chauhan’s Current Account	12,000
	30,000		30,000

Dr.	Partners’ Capital Account				Cr.
Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
			Balance b/d	60,000	40,000
Balance c/d	60000	40000
	60000	40000		60000	40000

Dr.	Partners’ Current Account				Cr.
Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
Drawings	12,000	8,000	Interest on Capital	3,000	2,000
Interest on Drawings	600	400	Partners’ Salaries	12,000	12,000
Balance c/d	20,400	17,600	Profit & Loss Appropriation	18,000	12,000
	33,000	26,000		33,000	26,000

b) ) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of  profit, the solution will be as:

Dr.		Profit and Loss Appropriation Account			Cr.
Particulars		AmountRs	Particulars		AmountRs
Partners’ Salary			Profit and Loss (Profit)		30,000
Tripathi 1,000 × 12 =	12,000	24,000	Interest on Drawings
Chauhan 1,000 × 12 =	12,000		Tripathi	600	1,000
Interest on Capital			Chauhan	400
Tripathi	3,000	5,000
Chauhan	2,000
Profit Transferred to
Tripathi’s Current	1,200	2,000
Chauhan’s Current	800
		31,000			31,000

Partners’ Capital Account

Dr.                                                                                  Cr.

Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
			Balance b/d	60,000	40,000
Balance c/d	60,000	40,000
	60,000	40,000		60,000	40,000

Partners’ Current Account

Dr.                                                                                  Cr.

Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
Drawings	12,000	8,000	Partners’ Salaries	12,000	12,000
Interest on Drawings	600	400	Interest on Capital	3,000	2,000
Balance c/d	3,600	6,400	Profit and Loss Appropriation	1,200	800
	16,200	14,800		16,200	14,800

As the question is silent about the treatment of Interest on Capitals, Salary, Interest on Drawings, so we have prepared the solution by following two methods, namely:

1. Charge against Profits

2. Out of Profits

This was done deliberately so as to make students aware-off the two above mentioned methods and also to match the answer with that of given in the NCERT. The appropriate answer to the question following Out of Profit Method should be as:

Tripathi’s Current A/c balance Rs 3,600 and

Chauhan’s Current A/c balance Rs 6,400.

In case no information regarding the treatment of above items is mentioned in the question, then we usually follow the Out of Profits Method.

Question 2: Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were Rs.90,000 and Rs.60,000. The profit during the year were Rs. 45,000. According to partnership deed, both partners are allowed salary, Rs. 700 per month to Anubha and Rs. 500 per month to Kajal. Interest allowed on capital @ 5%p.a. The drawings during the year were Rs. 8,500 for Anubha and Rs. 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating

Answer 2: a) Note: If Partners’ Salaries, Interest on Capital and Interest on Drawing are treated as these have already been adjusted in the Profit and Loss Account, the solution will be as follows:

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Profit Transferred to Current  A/c			Profit and Loss		45,000
Anubha’s Capital	30,000
Kajal’s Capital	15,000	45,000
		45,000			45,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Anubha	Kajal	Particulars	Anubha	Kajal
Drawings	8,500	6,500	Balance b/d	90,000	60,000
Interest on Drawings	425	325	Partners’ Salaries	8,400	6,000
			Interest on Capital	4,500	3,000
Balance c/d	1,23,975	77,175	Profit and Loss Appropriation	30,000	15,000
	1,32,900	84,000		1,32,900	84,000

b) Alternative Note: If Partners’ Salaries, Interest on Capital and Interest on Drawings are adjusted in the Profit and Loss Appropriation Account, the solution will be as follows:

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Partners’ Salaries:			Profit and Loss Account		45,000
Anubha	8,400		Interest on Drawings
Kajal	6,000	14,400	Anubha	425
			Kajal	325	750
Interest on Capital:
Anubha	4,500
Kajal	3,000	7,500
Profit Transferred to
Anubha’s Capital	15,900
Kajal’s Capital	7,950	23,850
		45,750			45,750

Partners’ Capital Account
Dr.					Cr.
Particulars	Anubha	Kajal	Particulars	Anubha	Kajal
Drawings	8,500	6,500	Balance b/d	90,000	60,000
Interest on Drawings	425	325	Partners’ Salaries	8,400	6,000
			Interest on Capital	4,500	3,000
Balance c/d	1,09,875	70,125	Profit and Loss Appropriation	15,900	7,950
	1,18,800	76,950		1,18,800	76,950

Question 3: Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed Rs. 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs. 1,00,000 to the firm, on October 01, 2019. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2020 amounted to Rs. 1,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i) he should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;
(iii) Interest on Capital and loan should be allowed @ 6% p.a.
You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

Answer 3: DISTRIBUTION OF PROFITS 

Harshad Claims: Decisions

(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.
(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims:  Decisions

(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.
(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration. 
(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a.

Profit and Loss Adjustment Account
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Interest on Partner’s Loan			Profit and Loss		1,80,000
Harshad 1,00,000 × (6/100) × (6/12)		3,000
Profit and Loss Appropriation		1,77,000
		1,80,000			1,80,000

Profit and Loss Account
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Profit Transferred to			Profit and Loss Adjustment		1,77,000
Harshad’s Capital		88,500
Sharma’s Capital		88,500
		1,77,000			1,77,000

Question 4: Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively on October 01, 2019. Aakriti Advanced. Rs, 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31 2020 showed profit of Rs, 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them by preparing Profit and Loss Appropriation Account. Also give reasons in Support of your answer.

Answer 4: In the absence of any agreement between partners
(i) Interest on Loan by a Partner: If no agreement exists, interest on loans by partners is allowed at 6% p.a..
(ii) Interest on Capital: In the absence of an agreement, no interest on capital is allowed.
(iii) Profit Sharing: In the absence of an agreement, profits are shared equally.

Profit and Loss Adjustment Account
Dr.							Cr.
Particulars			Amount₹	Particulars			Amount₹
Interest on Partner’s Loan				Profit and Loss			43,000
Aakriti 20,000 × (6/100) × (6/12)			600
Profit Transferred to
Aakriti’s Capital	21,200
Bindu’s Capital	21,200		42,400
			43,000				43,000

Question 5: Rakhi and Shikha are partners in a firm, with capitals of Rs. 2,00,000 and Rs, 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is Rs. 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs. 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew Rs. 7,000 and Shikha Rs. 10,000 for their personal use. As per partnership deed, salary and interest on capital appropriation treated as charge on profit. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

Answer 5: If interest on capital and Partners’ salaries will be provided even if firm involves in loss.

Profit and Loss Appropriation Account
Dr.									Cr.
Particulars			Amount₹	Particulars					Amount₹
Partner’s Salaries				Profit and Loss					23,200
Shikha			60,000	Loss Transferred to
				Rakhi Capital			34,720
Interest on Capital				Shikha’s Capital			52,080		86,800
Rakhi		20,000
Shikha		30,000	50,000
			1,10,000						1,10,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Rakhi	Shikha	Particulars	Rakhi	Shikha
Drawings	7,000	10,000	Balance b/d	2,00,000	3,00,000
Profit & Loss Appropriation	34,720	52,080	Partner’s Salaries		60,000
Balance c/d	1,78,280	3,27,920	Interest on Capital	20,000	30,000
	2,20,000	3,90,000		2,20,000	3,90,000

If interest on capital and salaries will be provided out of profit

Profit and Loss Appropriation Account
Dr.							Cr.
Particulars		Amount₹	Particulars				Amount₹
Partner’s Salaries			Profit and Loss				23,200
Shikha  {23,200 × (6/11)}		12,655
Interest on Capital
Rakhi {23,200 × (2/11)}		4,218
Shikha {23,200 × (3/11)}		6,327
		23,200					23,200

 If profit is less than the sum of distributable items, the distribution shall be in proportion to items for distribution.

Partners Salaries	Ratio
Shikhar (₹ 60,000)	6	23,200 × (6/11)	12,655
Interest on Capital
Rakhi (₹ 20,000)	2	23,200 × (2/11)	4,218
Shikhar (₹ 30,000)	3	23,200 × (3/11)	6,327
	11		23,200

Partners’ Capital Account
Dr.					Cr.
Particulars	Rakhi	Shikha	Particulars	Rakhi	Shikha
Drawings	7,000	10,000	Balance b/d	2,00,000	3,00,000
			Partner’s Salaries		12,655
Balance c/d	1,97,218	3,08,972	Interest on Capital	4,218	6,327
	2,04,218	3,18,972		2,04,218	3,18,972

Question 6: Lokesh and Azad are partners sharing profits in the ratio of 3:2, with capitals of ₹ 50,000 and ₹ 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of ₹ 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to ₹ 12,500. A provision of 5% of profits is to be made in respect of the manager’s commission. Prepare accounts showing the allocation of profits and partner’s capital accounts.

Answer 6:

Profit and Loss Adjustment Account
Dr.						Cr.
Particulars			Amount₹	Particulars		Amount₹
Interest on Capital				By Profit and Loss (12,500 + 2,500)		15,000
Lokesh		3,000
Azad		1,800	4,800
Partner’s Salaries
Azad			2,500
Provision forManager’s Commission 15,000 × (5/100)			750
Profit Transferred to
Lokesh Capital		4,170
Azad Capital		2,780	6,950
			15,000			15,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Lokesh	Azad	Particulars	Lokesh	Azad
			Balance b/d	50,000	30,000
			Interest on Capital	3,000	1,800
Balance c/d	57,170	37,080	Partner’s Salaries		2,500
			Profit and Appropriation	4,170	2,780
	57,170	37,080		57,170	37,080

Question 7: The partnership agreement between Maneesh and Girish provides that:
(i) Profits will be shared equally;
(ii) Maneesh will be allowed a salary of Rs. 400 p.m;
(iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary;
(iv) 7% interest will be allowed on partner’s fixed capital;
(v) 5% interest will be charged on partner’s annual drawings;
(vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000, respectively. Their annual drawings were Rs. 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2006 amounted to Rs. 40,000; Prepare firm’s Profit and Loss Appropriation Account.

Answer 7:

Profit and Loss Appropriation Account
Dr.							Cr.
Particulars			Amount₹	Particulars			Amount₹
Partner’s Salary				Profit and Loss			40,000
Maneesh			4,800	Interest on Drawings
				Maneesh		800
Partner’s Commission				Girish		700	1,500
Girish {(40,000 – 4,800) × (10/100)}			3,520
Interest on Capital
Maneesh		7,000
Girish		5,600	12,600
Profit Transferred to
Maneesh’s Current		10,290
Girish’s Current		10,290	20,580
			41,500				41,500

Note: As period of drawings are not given, 900 will be calculated for the period of 6 months.

Question 8: Ram, Raj and George are partners sharing profits in the ratio 5:3:2. According to the partnership agreement, George is to get a minimum amount of ₹ 10,000 as his share of profits every year. The net profit for the year 2013 amounted to ₹ 40,000. Prepare the Profit and Loss Appropriation Account.

Answer 8:

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Profit Transferred to			Profit and Loss		40,000
Ram’s Capital (20,000 – 1,250)		18,750
Raj’s Capital (12,000 – 750)		11,250
George’s Capital (8,000 + 1,250 + 750)		10,000
		40,000			40,000

Note: If the partner guaranteed, does not get assured amount as profit then the deficit is to be given by the remaining partners as questions says. If no information is given, the contribution will be in Profit sharing ratio.

Question 9: Amann, Babita and Suresh are partners in a firm. Their profit-sharing ratio is 2:2:1. Suresh is guaranteed a minimum amount of ₹ 10,000 as a share of profit every year. Any deficiency on that account shall be met by Babita. The profits for the two years ending March 31, 2016, and March 31, 2017, were ₹ 40,000 and ₹ 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

Answer 9:

Profit and Loss Appropriation Account for the Year Ended 31st March 2016
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Profit Transferred to			Profit and Loss		40,000
Amann’s Capital  16,000		16,000
Babita’s Capital (16,000 – 2,000)		14,000
Suresh’s Capital (8,000 + 2,000)		10,000
		40,000			40,000

Profit and Loss Appropriation Account for the Year Ended 31st March 2017
Dr.					Cr.
Particulars		Amount₹	Particulars		Amount₹
Profit transferred to			Profit and Loss		60,000
Amann’s Capital		24,000
Babita’s Capital		24,000
Suresh’s Capital		12,000
		60,000			60,000

Question 10: Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2006 shows a net profit of Rs. 1,50,000. Prepare the Profit and Loss Appropriation Account by taking into consideration the following information:
(i) Partners capital on April 1, 2005; Simmi, Rs. 30,000; Sonu, Rs. 60,000;
(ii) Current accounts balances on April 1, 2005; Simmi, Rs. 30,000 (cr.); Sonu, Rs. 15,000 (cr.);
(iii) Partners drawings during the year amounted to Simmi, Rs. 20,000; Sonu, Rs. 15,000;
(iv) Interest on capital was allowed @ 5% p.a.;
(v) Interest on drawing was to be charged @ 6% p.a. at an average of six months;
(vi) Partners’ salaries : Simmi Rs. 12,000 and Sonu Rs. 9,000.

Answer 10:

Profit and Loss Appropriation Account
Dr.							Cr.
Particulars			Amount₹	Particulars			Amount₹
Interest on Capital				Profit and Loss Account			1,50,000
Simmi		1,500		Interest on Drawings
Sonu		3,000	4,500	Simmi		600
				Sonu		450	1,050
Partners’ Salaries
Simmi		12,000
Sonu		9,000	21,000
Profit transferred to
Simmi’s Current		94,162
Sonu’s Current		31,388	1,25,550
			1,51,050				1,51,050

Partners’ Capital Account
Dr.					Cr.
Particulars	Simmi	Sonu	Particulars	Simmi	Sonu
			Balance b/d	30,000	60,000
Balance c/d	30,000	60,000
	30,000	60,000		30,000	60,000

Partners’ Current Account
Dr.					Cr.
Particulars	Simmi	Sonu	Particulars	Simmi	Sonu
Drawings	20,000	15,000	Balance b/d	30,000	15,000
Interest on Drawings	600	450	Interest on Capital	1,500	3,000
			Partners’ Salaries	12,000	9,000
Balance c/d	1,17,662	43,388	Profit and Loss Appropriation	94,162	31,388
	1,37,662	58,388		1,37,662	58,388

Question 11: Arvind and Anand are partners sharing profits and losses in the ratio 8:3:1 Balances in their capital accounts on April 01, 2019 were, Arvind- Rs. 4,40,000 and Anand Rs. 2,60,000. As per their agreement, partners were entitled to interest on capital @ 5% p.a., and interest on drawings was to be charged @ 6% p.a. Arvind was allowed an annual salary of Rs. 35,000/- for the additional responsibilities taken up by him. Partners drawings for the year were, I Arvind Rs. 40,000 and Anand Rs. 28,000. Profit and loss account of the firm for the year ending March 31, 2020 showed a Net Loss of Rs. 32,400. Prepare Profit and Loss Appropriation Account.

Answer 11:

Dr.	Profit and Loss Appropriation A/c			Cr.
Particulars	₹	Particulars		₹
To P& L – Loss	32,400	By Interest on drawings
		Arvind	1,200	2040
		Anand	840
		By loss t/fd to capital accounts
		Arvind	22,770	30,360
		Anand	7,590
	32,400			32,400

No salary and interest on capital will be allowed in case of loss.

Interest on drawings:

Arvind = 40,000 × 6/100 × 6/12 = Rs. 1,200

Anand = 28,000 × 6/100 × 6/12 = Rs. 840

Question 12: Ramesh and Suresh were partners in a firm, sharing profits in the ratio of their capital contributed on commencement of business which was ₹ 80,000 and ₹ 60,000, respectively. The firm started business on April 1, 2016. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of ₹ 2,000 and ₹ 3,000, respectively.
The profits for the year ended March 31, 2017, before making the above appropriations, was ₹ 1,00,300. The drawings of Ramesh and Suresh were ₹ 40,000 and ₹ 50,000, respectively. Interest on drawings amounted to ₹ 2,000 for Ramesh and ₹ 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and Partners’ Capital Accounts, assuming that their capitals are fluctuating.

Answer 12:

Profit and Loss Appropriation Account
Dr.							Cr.
Particulars			Amount₹	Particulars			Amount₹
Interest on Capital				Profit and Loss			1,00,300
Ramesh		9,600		Interest on Drawings
Suresh		7,200	16,800	Ramesh		2,000
				Suresh		2,500	4,500
Partners’ Salaries
Ramesh		24,000
Suresh		36,000	60,000
Profit Transferred to
Ramesh’s Capital {28,000 × (4/7)}			16,000
Suresh’s Capital {28,000 × (3/7)}			12,000
			1,04,800				1,04,800

Partners’ Capital Account
Dr.					Cr.
Particulars	Ramesh	Suresh	Particulars	Ramesh	Suresh
Drawings	40,000	50,000	Cash	80,000	60,000
Interest on Drawings	2,000	2,500	Interest on Capital	9,600	7,200
Balance c/d	87,600	62,700	Partners’ Salaries	24,000	36,000
			Profit & Loss Appropriation	16,000	12,000
	1,29,600	1,15,200		1,29,600	1,15,200

Note: Word Cash is used in capital A/c instead of Balance b/d as the business started this year.

Profit of Ramesh = 28,000 × 4/7 = ₹16,000 and

Suresh = 28,000 × 3/7 ₹12,000

Question 13: Sukesh and Vanita were partners in a firm. Their partnership agreement
provides that:
(i) Profits would be shared by Sukesh and Vanita in the ratio of 3:2;
(ii) 5% interest is to be allowed on capital;
(iii) Vanita should be paid a monthly salary of Rs. 600.
The following balances were extracted from the books of the firm on March 31, 2017.

Sukesh	Verma
	₹	₹
Capital Accounts	40,000	40,000
Current Accounts	(Cr.)   7,200	(Cr.)   2,800
Drawings	10,850	8,150

Net profit for the year, before charging interest on capital and after charging partner’s salary, was ₹ 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

Answer 13:

Profit and Loss Appropriation Account
Dr.							Cr.
Particulars			Amount₹	Particulars			Amount₹
Interest on Capital				Profit and Loss			9,500
Sukesh		2,000
Vanita		2,000	4,000
Profit Transferred to
Sukesh’s Current {5,500 × (3/5)}			3,300
Vanita’s Current {28,000 × (2/5)}			2,200
			9,500				9,500

Partner’s Capital Account
Dr.					Cr.
Particulars	Sukesh	Vanita	Particulars	Sukesh	Vanita
			Balance b/d	40,000	40,000
Balance c/d	40,000	40,000
	40,000	40,000		40,000	40,000

Partner’s Current Account
Dr.					Cr.
Particulars	Sukesh	Vanita	Particulars	Sukesh	Vanita
Drawings	10,850	8,150	Balance b/d	7,200	2,800
			Partner’s Salaries		7,200
			Profit and Loss Appropriation	3,300	2,200
Balance c/d	1,650	6,050	Interest on Capital	2,000	2,000
	12,500	14,200		12,500	14,200

Question 14: Rahul, Rohit and Karan started partnership business on April 1, 2019 with capitals of Rs 20,00,000, Rs 18,00,000 and Rs 16,00,000, respectively. The profit for the year ended March 2020 amounted to Rs 1,35,000 and the partner’s drawings had been Rahul Rs 50,000, Rohit Rs 50,000 and Karan Rs 40,000. The profits are distributed among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.

Answer 14: To calculate Interest on Capital, we need to apply the formula:

Interest on Capital = Capital × Rate of Interest × Time

Here:

• Rate of interest = 5% per annum
• Time = 1 year (April 1, 2019, to March 31, 2020)

Step 1: Calculate Interest on Capital for Each Partner

Rahul: Interest on Capital (Rahul) = 20,00,000 × 5% = 1,00,000

Rohit: Interest on Capital (Rohit) = 18,00,000 × 5% = 90,000

Karan: Interest on Capital (Karan) = 16,00,000 × 5% = 80,000

Final Interest on Capital

• Rahul: Rs. 1,00,000
• Rohit: Rs. 90,000
• Karan: Rs. 80,000

Question 15: Sunflower and Pink Rose started partnership business on April 01, 2019 with capitals of Rs. 2,50,000 and Rs.1,50,000, respectively. On October 01, 2019, they decided that their capitals should be Rs. 2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2020.

Answer 15: To calculate the interest on capital for Sunflower and Pink Rose, we need to account for the adjustments in their capital during the year and compute the interest for each period separately.

Details

• Initial Capital of Sunflower: Rs. 2,50,000
• Initial Capital of Pink Rose: Rs. 1,50,000
• On October 01, 2019, both partners adjusted their capitals to Rs. 2,00,000 each.
• Rate of Interest on Capital: 10% p.a.
• Period: April 1, 2019, to March 31, 2020 (1 year)

Sunflower’s Interest on Capital

1. For the first 6 months (April 1 to September 30, 2019):
   Capital: Rs. 2,50,000
   Interest = 2,50,000 × 10% × \(\frac{6}{12}\) = 12,500
2. For the next 6 months (October 1, 2019, to March 31, 2020):
   Adjusted Capital: Rs. 2,00,000
   Interest = 2,00,000 × 10% × \(\frac{6}{12}\) = 10,000

Total Interest for Sunflower: 12,500 + 10,000 = 22,500

Step 2: Pink Rose’s Interest on Capital

1. For the first 6 months (April 1 to September 30, 2019):
   Capital: Rs. 1,50,000
   Interest = 1,50,000 × 10% × \(\frac{6}{12}\) = 7,500
2. For the next 6 months (October 1, 2019, to March 31, 2020):
   Adjusted Capital: Rs. 2,00,000
   Interest = 2,00,000 × 10% × \(\frac{6}{12}\) = 10,000

Total Interest for Pink Rose: 7,500 + 10,000 = 17,500

Question 16: On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at Rs. 4,00,000,Rs.3,00,000 and Rs. 2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to Rs. 1,50,000 and the partner’s drawings had been Mountain: Rs. 20,000, Hill Rs. 15,000 and Rock Rs. 10,000.
Calculate interest on capital.

Answer 16: Generally, interest on Capital is calculated on the opening balance of capital if additional capital is not given.

	Mountain	Hill	Rock
Closing Capital	4,00,000	3,00,000	2,00,000
Add: Drawings	20,000	15,000	10,000
Less: Profit (1:1:1)	(50,000)	(50,000)	(50,000)
Opening Capital	3,70,000	2,65,000	1,60,000

Interest on Capital

Mountain	3,70,000 ×10/100 = ₹ 37,000
Hill	2,65,000 × 10/100 = ₹ 26,500
Rock	1,60,000 × 10/100 = ₹ 16,000

Question 17: Following is the extract of the Balance Sheet of, Neelkant and Mahadev as on March 31, 2020:

Balance Sheet as at March 31, 2020

Liabilities	Amount (Rs)	Assets	Amount (Rs)
Neelkant’s Capital	10,00,000	Sundry Assets	30,00,000
Mahadev’s Capital	10,00,000
Neelkant’s Current Account	1,00,000
Mahadev’s Current Account	1,00,000
Profit and Loss Apprpriation (March 2017)	8,00,000
	30,00,000		30,00,000

During the year Mahadev’s drawings were Rs. 30,000. Profits during 2019-20 is Rs. 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2020.

Answer 17: Interest on Capital

Neelkant ⇒ 10,00,000 × \(\frac{5}{100}\) = ₹50,000

Mahadev ⇒ 10,00,000 × \(\frac{5}{100}\) = ₹50,000

Question 18: Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2020.

May 01, 2019	Rs 12000
July 31, 2019	Rs 6000
September 30, 2019	Rs 9000
November 30, 2019	Rs 12000
January 01, 2020	Rs 8000
March 31, 2020	Rs 7000

Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.

Answer 18: Product Method

	Drawings × Period	Product
01 May, 2019 to 31 March 2020	12,000 × 11 =	1,32,000
31 July, 2019 to 31 March 2020	6,000 × 8 =	48,000
30 September, 2019 to 31 March 2020	9,000 × 6 =	54,000
30 Nov. 2019 to 31 March 2020	12,000 × 4 =	48,000
01 Jan. 2020 to 31 March 2020	8,000 × 3 =	24,000
31 March 2020 to 31 March 2020	7,000 × 0 =	0
	Sum of Product	3,06,000

Here the formula will be

Interest on Drawings = Product × \(\frac{Rate}{100}\) × \(\frac{1}{12}\)

= 306000 × \(\frac{9}{100}\) × \(\frac{1}{12}\)

= Rs 2295

Question 19: The capital accounts of Moli and Golu showed balances of Rs 40,000 and Rs 20,000 as on April 01, 2019. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu advanced a loan of Rs 10,000 to the firm on August 01, 2019. During the year, Moli withdrew Rs 1,000 per month at the beginning of every month whereas Golu withdrew Rs 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was Rs 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.

Answer 19:

Profit and Loss Adjustment Account
Dr.								Cr.
Particulars				Amount₹	Particulars			Amount₹
Interest on Capital					Profit and Loss Account			20,950
Moli			4,000		Interest on Drawings
Golu			2,000	6,000	Moli		780
					Golu		660	1,440
Interest on Partner’s Loan
Golu’s {10,000 × (6/100) × (8/12)}				400
Profit Transferred to
Moli’s Capital {15,990 × (3/5)}			9,594
Golu’s Capital {15,990 × (2/5)}			6,396	15,990
				22,390				22,390

Partners’ Capital Account
Dr.					Cr.
Particulars	Moli	Golu	Particulars	Moli	Golu
Drawings	12,000	12,000	Balance b/d	40,000	20,000
Interest on Drawing	780	660	Interest on Capital	4,000	2,000
Balance c/d	40,814	15,736	Profit and Loss Adjustment	9,544	6,396
	53,594	28,396		53,594	28,396

Working Note:

Calculation of interest on Drawings

⇒ Total Drawings × Rate × \(\frac{Average Period}{12}\)

Moli ⇒ 12,000 × \(\frac{12}{100}\) × \(\frac{6.5}{12}\) = ₹780

Golu ⇒ 12,000 × \(\frac{12}{100}\) × \(\frac{5.5}{12}\) = ₹660

Note:  

1. If drawings is done at the beginning of every month, then interest on drawings is calculated of 6 \(\frac{1}{2}\) months.
2. If drawings is done at the ending of every month, then interest on drawings is calculated of 5 \(\frac{1}{2}\) months.
3. If rate of interest on loan is not given, then it will be charged always 6%.
4. Interest on Partner’s Loan being a charge on profits, it to be shown as a deduction from Net Profit in Profit and Loss Appropriation Account or shown on the debit side of Profit and Loss Account.

Question 20: Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of Rs 40,000 and Rs 30,000, respectively. They withdrew from the firm the following amounts, for their personal use: 

Rakesh	Month	Rs.
	May 31, 2019	600
	June 30, 2019	500
	August 31, 2019	1,000
	November 1, 2019	400
	December 31, 2019	1,500
	January 31, 2020	300
	March 01, 2020	700
Rohan	At the beginning of each month	400

Interest is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of account are closed on March 31, 2020, every year.

Answer 20: Rakesh’s Interest on Drawings

	Drawings × Period	Product
31 May 2019 to 31 March 2020	600 × 10 =	6,000
30 June 2019 to 31 March 2020	500 ×   9 =	4,500
31 August 2019 to 31 March 2020	1,000 ×   7 =	7,000
1 November 2019 to 31 March 2020	400 ×   5 =	2,000
31 December 2019 to 31 March 2020	1,500 ×   3 =	4,500
31 January 2020 to 31 March 2020	300 ×   2 =	6,00
01 March 2020 to 31 March 2020	700 ×   1 =	700
	Sum of Product	25,300

Interest on Drawings of Rakesh

⇒ Sum of product × Rate × \(\frac{1}{12}\) = 25,300 × \(\frac{6}{100}\) × \(\frac{1}{12}\) = ₹126.50

Interest on Rohan’s Drawings (By Average Method)

⇒ Total Drawings × Rate × \(\frac{6.5}{12}\) = 4,800 × \(\frac{6}{100}\) × \(\frac{13}{2×12}\) = ₹156

Question 21: Himanshu withdrews ₹2,500 at the end of each month. The Partnership deed provides for charging the interest on drawings @ 12% p.a. Calculate interest on Himanshu’s drawings for the year ending March 31, 2017.

Answer 21: Total Drawing of Himanshu = Rs 2,500 × 12 = Rs 30,000

Interest on Drawing = Total Drawings × \(\frac{Rate}{100}\) × \(\frac{11}{2×12}\)

= Rs 30000 × \(\frac{12}{100}\) × \(\frac{11}{2×12}\)

= Rs 1650

Question 22: Bharam is a partner in a firm. He withdraws Rs. 3,000 at the starting of each month for 12 months. The books of the firm are closed on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.

Answer 22: Total Drawing of Bharam = Rs 3,000 × 12 = Rs 36,000

Interest on Drawing = Total Drawings × \(\frac{Rate}{100}\) × \(\frac{13}{2×12}\)

= Rs 36000 × \(\frac{10}{100}\) × \(\frac{13}{2×12}\)

= Rs 1950

Question 23: Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2019 were Rs. 2,50,000 and Rs. 1,50,000, respectively. They share profits equally. On July 01, 2019, they decided that their capitals should be Rs. 1,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2020.

Answer 23: Interest on Capital

Raj

	Capital × Period	Product
1 April 2017 to 30 June 2017	2,50,000 × 3 =	7,50,000
1 July 2017 to 31 March 2018	1,00,000 × 9 =	9,00,000
	Sum of Product	16,50,000

Interest = Sum of Product × \(\frac{Rate}{100}\) × \(\frac{1}{12}\)

= Rs 1650000 × \(\frac{8}{100}\) × \(\frac{1}{12}\)

= Rs 11000

Neeraj

	Capital × Period	Product
1 April 2017 to 30 June 2017	1,50,000 × 3 =	4,50,000
1 July 2017 to 31 March 2018	1,00,000 × 9 =	9,00,000
	Sum of Product	13,50,000

Interest = 1350000 × \(\frac{8}{100}\) × \(\frac{1}{12}\) = Rs 9000

Question 24: Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings during 2019 were Rs. 24,000 and Rs. 16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.

Answer 24: Interest on Drawing = Drawing x Rate/100 x 6/12

Amit = 24000 x 10/100 x 6/12 = 1200

Bhola = 16000 x 10/100 x 6/12 = 800

Question 25: Harish is a partner in a firm. He withdrew the following amounts during the year 2019:

	Rs
May 2019	4,000
August 2019	10,000
September 2019	4,000
December 2019	12,000
March 2020	4,000

Interest on drawings is to be charged @ 7.5 % p.a.

Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2020.

Answer 25: Calculation of Interest on Harish’s Drawings:

	Drawing x Period	Product
May 2019 to March 2020	4000 x 11	44000
August 2019 to March 2020	10000 x 8	80000
September 2019 to March 2020	4000 x 6	24000
December 2019 to March 2020	12000 x 2	24000
March 2020 to March 2020	4000 x 0	0
	Sum of Product	172000

Interest on Drawing = 172000 x 7.5/100 x 1/12 = 1075

Question 26: Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are Rs. 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming that money is withdrawn: (i) in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of every month.

Answer 26: (i) If they withdraw money in the beginning of each month Interest on drawing = Total Drawing x Rate x 13/(2 x 12)

Menon = 24000 x 10/100 x 13/(2 x 12) = 1300

Thomas = 24000 x 10/100 x 13/(2 x 12) = 1300

(ii) If they withdraw in the middle of every month Interest on drawing = Total Drawing x Rate x 6/12

Menon = 24000 x 10/100 x 6/12 = 1200

Thomas = 24000 x 10/100 x 6/12 = 1200

(iii) If they withdraw at the end of every month

Interest on drawing = Total Drawing x Rate x 11/(2 x 12) 

Menon = 24000 x 10/100 x 11/(2 x 12) = 1100

Thomas = 24000 x 10/100 x 11/(2 x 12) = 1100

Question 27: On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of Rs. 24,000 Rs. 18,000 and Rs. 12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to Rs. 36,000 and the partner’s drawings had been Ram, Rs. 3,600; Shyam, Rs. 4,500 and Mohan, Rs. 2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.

Answer 27:

	Ram	Shyam	Mohan
Capital on March 31	24000	18000	12000
Add: Drawings	3600	4500	2700
Less: Profit (3:2:1)	-18000	-12000	-6000
Capital on April 1, 2003	9600	10500	8700

Here, Interest on capital = Opening Capital x Rate/100 

Ram = 9600 x 5/100 = 480

Shyam = 10500 x 5/100 = 525 

Mohan = 8700 x 5/100 = 435

Question 28: Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to be a minimum sum of Rs 8,000. Profits for the year ended March 31, 2017 was Rs 36,000. Divide profit among the partners by preparing profit and loss appropriation account.

Answer 28: Guarantee of Profit to the Partners

Profit and Loss Appropriation Account
Dr.							Cr.
Particulars				Amount₹	Particulars		Amount₹
Profit Transferred to					Profit and Loss		36,000
Amit’s Capital			18,000
Less: Gurantee to Samiksha{2,000 × (3/5)}			(1,200)	16,800
Sumit’s Capital			12,000
Less: Gurantee to Samiksha{2,000 × (2/5)}			(800)	11,200
Samiksha Capital		6,000
Add: Amit’s Guarantee			1,200
Add: Sumit’s Guarantee			800	8,000
				36,000			36,000

Question 29: Pinki, Deepti and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than Rs. 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to Rs. 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.

Answer 29:

Sr. no.	Particulars	Dr. (Rs.)	Cr. (Rs)
1.	Profit and Loss A/c   …Dr.	40,000
	To Pinky’s capital A/c		20,000
	To Dipti’s Capital A/c		16,000
	To Kaku’s capital A/c		4,000
	(Profit will be distributed among the partners in the ratio 5 : 4 : 1)
2.	Pinky’s capital A/c   …Dr.	500
	Dipti’s Capital A/c   …Dr.	500
	To Kaku’s Capital A/c		1000
	(The loss will be shared equally by both the partners)

Dr.							Profit and Loss Appropriation Account					Cr.
Particulars							Amount Rs	Particulars				AmountRs
Profit transferred to								Profit & Loss				40,000
Pinki’s Capital					20,000		19,500
Less: Gurantee to Kaku  {1,000 × (1/2)}					(500)
Deepti’s Capital					16,000		15,500
Less: Guarantee to Kaku  {1,000 × (1/2)}					(500)
Kaku’s Capital		4,000					5,000
Add: Deficiency received from
Pinki						500
Deepti						500
							40,000					40,000

Question 30: Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed Rs. 10,000 as her share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are Rs. 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.

Answer 30:

Profit and Loss Appropriation Account as on March 31, 2016
Dr.												Cr.
Particulars							Amount₹	Particulars				Amount₹
Profit Transferred to								Profit and Loss				40,000
Abhay’s Capital							20,000
Siddharth’s Capital					12,000
Less: Guarantee to Kusum’s					(2,000)		10,000
Kusum’s Capital		8,000
Add: Deficiency Received from Siddharth						2,000	10,000
							40,000					40,000

Profit and Loss Appropriation Account as on March 31, 2017
Dr.					Cr.
Particulars	Amount₹			Particulars	Amount₹
Profit transferred to				Profit and Loss	60,000
Abhay’s Capital	30,000
Siddharth’s Capital	18,000
Kusum’s Capital	12,000
	60,000				60,000

Question 31: Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than Rs 5,000. The profits for the year ending March 31, 2020 amount to Rs 35,000. If any, a shortfall in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entries to show profit distribution among partners.

Answer 31:

Profit and Loss Appropriation Account
Dr.										Cr.
Particulars					Amount₹	Particulars				Amount₹
Profit Transferred to						Profit and Loss				35,000
Radha’s Capital				17,500
Less: Fatima’s Deficiency {1,500 × (3/5)}				(900)	16,600
Mary’s Capital				14,000
Less: Fatima’s Deficiency {1,500 × (2/5)}				(600)	13,400
Fatima’s Capital		3,500
Add: Deficiency Born by
Radha				900
Mary				600	5,000
					35,000					35,000

Journal
Date	Particulars		L.F.	DebitAmount₹	CreditAmount₹
	Profit and Loss Appropriation A/c	Dr.		35,000
	To Radha’s Capital A/c				16,600
	To Mary’s Capital A/c				13,400
	To Fatima’s Capital A/c				5,000
	(Profit distributed among Partners)

Alternative Method

Journal
Date	Particulars		L.F.	DebitAmount₹	CreditAmount₹
	Profit and Loss Appropriation A/c	Dr.		35,000
	To Radha’s Capital A/c				17,500
	To Mary’s Capital A/c				14,000
	To Fatima’s Capital A/c				3,500
	(Profit Distributed among Partners)
	Radha’s Capital A/c	Dr.		900
	Mary’s Capital A/c	Dr.		600
	To Fatima’s Capital A/c				1,500
	(Deficiency of Fatima’s Share Taken from Radha andMary)

Question 32: X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of Rs 8,000. The net profit for the year ended March 31, 2020 was Rs 30,000. Prepare Profit and Loss Appropriation Account.

Answer 32:

Profit and Loss Appropriation Account as on March 31, 2017
Dr.										Cr.
Particulars					Amount₹	Particulars				Amount₹
Profit Transferred to						Profit and Loss				30,000
X’s Capital			15,000
Less: Z’s Deficiency {3,000 × (3/5)}			(1,800)		13,200
Y’s Capital			10,000
Less: Z’s Deficiency {3,000 × (2/5)}			(1,200)		8,800
Z’s Capital				5,000
Add: Share of Deficiency born by
Radha				1,800
Mary				1,200	8,000
					30,000					30,000

Question 33: Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of Rs 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the profit and loss appropriation account showing distribution of profits among partners in case the profits for year 2015 are: (i) Rs 2,50,000; (ii) 3,60,000.

Answer 33: (i) 

Profit and Loss Appropriation Account as on March 31, 2015
Dr.											Cr.
Particulars						Amount₹	Particulars				Amount₹
Profit Transferred to							Profit and Loss				2,50,000
Arun’s Capital					1,00,000
Less: Chintu’s Share of Deficiency					(10,000)	90,000
Bobby’s Capital						1,00,000
Chintu’s Capital					50,000
Add: Deficiency Received from Arun					10,000	60,000
						2,50,000					2,50,000

(ii)

Profit and Loss Appropriation Account as on March 31, 2015
Dr.						Cr.
Particulars			Amount₹	Particulars		Amount₹
Profit Transferred to				Profit and Loss		3,60,000
Arun’s Capital {3,60,000 × (2/5)}			1,44,000
Bobby’s Capital {3,60,000 × (2/5)}			1,44,000
Chintu’s Capital {3,60,000 × (1/5)}			72,000
			3,60,000			3,60,000

Question 34: Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall be less than Rs 20,000. The net profit for the year ended March 31, 2017 amounted to Rs 70,000. Prepare Profit and Loss Appropriation Account.

Answer 34:

Profit and Loss Appropriation Account as on March 31, 2017
Dr.											Cr.
Particulars						Amount₹	Particulars				Amount₹
Profit Transferred to							Profit and Loss				70,000
Ashok’s Capital					28,000
Less: Cheena’s Share of Deficiency {6,000 × (1/2)}					(3,000)	25,000
Brijesh’s Capital					28,000
Less: Cheena’s Share of Deficiency {6,000 × (1/2)}					(3,000)	25,000
Cheena’s Capital		14,000
Add: Deficiency Received from
Ashok					3,000
Brijesh					3,000	20,000
						70,000					70,000

Question 35: Ram, Mohan and Sohan are partners with capitals of Rs 5,00,000, Rs 2,50,000 and 2,00,000 respectively.After providing interest on capital @ 10% p.a. the profits are divisible as follows:
Ram 1/2 , Mohan 1/3 Sohan 1/6 . But Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than Rs 25,000, in any year. The net profit for the year ended March 31, 2017 is Rs 2,00,000, before charging interest on capital. You are required to show distribution of profit by preparing P & L Appropriation Account.

Answer 35:

Profit and Loss Appropriation A/c as on 31 March 2017
Dr.						Cr.
Particulars				Amount₹	Particulars	Amount₹
Interest on Capital					Profit and Loss	2,00,000
Ram			50,000
Mohan			25,000
Sohan			20,000	95,000
Profit Transferred to
Ram’s Capital			52,500
Less: Share of Deficiency {7,500 × (3/5)}			(4,500)	48,000
Mohan’s Capital			35,000
Less: Share of Deficiency {7,500 × (2/5)}			(3,000)	32,000
Sohan’s Capital			17,500
Add: Deficiency Received from
Ram			4,500
Mohan			3,000	25,000
				2,00,000		2,00,000

Question 36: Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following :
(i) Sona’s share in the profits, guaranteed to be not less than Rs. 15,000 in any year.
(ii) Babita gave guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is Rs. 25,000). The net profit for the year ended March 31, 2017 is Rs. 75,000. The gross fee earned by Babita for the firm was Rs. 16,000. You are required to prepare Profit and Loss Appropriation Account.

Answer 36:

Profit and Loss Appropriation Account as on March 31, 2017
Dr.						Cr.
Particulars				Amount₹	Particulars	Amount₹
Profit Transferred to					Profit and Loss	75,000
Amit’s Capital {84,000 × (3/6)}			42,000		Babita’s Capital	9,000
Less: Sona’s Share of Deficiency {1,000 × (3/5)}			(600)	41,400	(Deficiency  of Fees 25,000 – 16,000)
Babita’s Capital {84,000 × (2/6)}			28,000
Less: Sona’s Share of Deficiency {1,000 × (2/5)}			(400)	27,600
Sona’s Capital {84,000 × (1/6)}			14,000
Add: Deficiency Received from
Amit			600
Babita			400	15,000
				84,000		84,000

Question 37: The net profit of X, Y and Z for the year ended March 31, 2020 was Rs. 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books :
(i) Interest on Capital @ 5% p.a.
(ii) Interest on drawings amounting to X Rs. 700, Y Rs. 500 and Z Rs. 300.
(iii) Partner’s Salary : X Rs. 1000, Y Rs. 1500 p.a. The capital accounts of partners were fixed as : X Rs. 1,00,000, Y Rs. 80,000 and Z Rs. 60,000. Record the adjustment entry.

Answer 37:

Past Adjustment

	X	Y	Z		Total
Interest on Capital	5,000	4,000	3,000	=	12,000
Less: Interest on Drawings	(700)	(500)	(300)	=	(1,500)
Add: Partner’s Salaries	1,000	1,500	NIL	=	2,500
Right Distribution of ₹ 13,000	5,300	5,000	2,700	=	13,000
Less: Wrong distribution of ₹ 13,000 (3:1:1)	(7,800)	(2,600)	(2,600)	=	(13,000)
	(2,500) Dr.	2,400 Cr	100 Cr	=	NIL

Explanation:

Capital has a credit balance if it is deducted will be debited, and if it is added, it will be credited.

Here X wrongly took an excess ₹ 2,500; hence, ₹ 2,500 will be deducted from X’s capital Account; on the other hand, Y and Z took less amount than they should have been taken; hence the capital account of Y and Z will be added.

Date	Particulars			L.F	Debit Amount ₹	Credit Amount ₹
	X’s Capital A/c		Dr.		2,500
		To Y’s Capital A/c				2,400
		To Z’s Capital A/c				100
	(Profit adjusted among partners)

Question 38: The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit sharing ratio should come into effect retrospectively were for the last three year. Harry and Porter have agreement on this account. The profits for the last three years were:

	Rs
2014-15	22,000
2015-16	24,000
2016-17	29,000

Show adjustment of profits by means of a single adjustment journal entry. 

Answer 38:

Distribution of Profit

Old Ratio (2:2:1)	Harry	Porter	Ali		Total
Year
2014 – 15	(8,800)	(8,800)	(4,400)	=	(22,000)
2015 – 16	(9,600)	(9,600)	(4,800)	=	(24,000)
2016 – 17	(11,600)	(11,600)	(5,800)	=	(29,000)
				=
Total Profit of 3 Years in the Old Ratio	(30,000)	(30,000)	(15,000)	=	(75,000)
Distribution of 3 Years Profit in New Ratio (1:1:1)	25,000	25,000	25,000	=	75,000
Adjusted Profit	(5,000)	(5,000)	10,000		NIL

Journal (Adjusting entry)

Date	Particulars		L.F	Debit Amount ₹	Credit Amount ₹
	Harry’s Capital A/c	Dr.		5,000
	Porter’s Capital A/c	Dr.		5,000
	To Ali’s Capital A/c				10,000
	(Profit adjusted due to change in profit sharing ratio)

Question 39: Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on March 31, 2017.

Liabilities			Amount (Rs)	Assets			Amount (Rs)
Mannu’s Capital		30,000	40,000	Drawings :
Shristhi’s Capital		10,000		Mannu		4,000	6,000
				Shristhi		2,000
				Other Assets			34,000
			40,000				40,000

Profit for the year ended March 31, 2017 was Rs 5,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and @ 6% p.a. on drawings was inadvertently enquired. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry.

Answer 39: Adjustment of Profit

	Mannu’s	Shrishti		Total
Interest on Capital	1,500	500	=	2,000
Less: Interest on Drawings	(120)	(60)	=	(180)
Right Distribution of ₹ 1,820	1,380	440	=	1,820
Less: Wrong Distribution of ₹ 1,820 (3:2)	(1,092)	(728)	=	(1,820)
Adjusted Profit	288	(288)	=	NIL

Adjusting Journal Entry

Date	Particulars		L.F	Debit Amount ₹	Credit Amount ₹
	Shrishti’s Capital A/c	Dr.		288
	To Mannu’s Capital A/c				288
	(Adjustment of profit made)

Question 40: On March 31, 2017 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were Rs 80,000, Rs 60,000 and Rs 40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin Rs 20,000; Monu, Rs 15,000 and Ahmed, Rs 9,000. Interest on drawings chargeable to partners were Eluin Rs 500, Monu Rs 360 and Ahmed Rs 200. The net profit during the year amounted to Rs 1,20,000. The profit sharing ratio was 3 : 2 : 1. Pass necessary adjustment entries.

Answer 40: In this question, interest on capital shall be calculated on opening capital.

	Elvin	Monu	Ahmed
Capital on 31 Mar. 2017 (Closing Capital)	80,000	60,000	40,000
Add: Drawings	20,000	15,000	9,000
Less: Profit ₹ 120,000 (3:2:1)	(60,000)	(40,000)	(20,000)
Capital on April 01, 2016 (Opening Capital)	40,000	35,000	29,000

Adjustment of Profit

	Elvin	Monu	Ahmed		Total
Interest on Capital (on Opening Capital)	2,000	1,750	1,450	=	5,200
Less: Interest on Drawings	(500)	(360)	(200)	=	(1,060)
Right Distribution of ₹ 4,140	1,500	1,390	1,250	=	4,140
Less: Wrong Distribution of ₹ 4,140 (in the ratio 3:2:1)	(2,070)	(1,380)	(690)	=	(4,140)
	(570)	10	560	=	NIL

Adjusting Journal Entry

Date	Particulars		L.F.	Debit Amount₹	Credit Amount ₹
	Elvin’s Capital A/c	Dr.		570
	To Monu’s Capital A/c				10
	To Ahmed’s Capital A/c				560
	(Adjustment of Profit made)

Question 41: Azad and Benny are equal partners. Their fixed capitals are Rs. 40,000 and Rs. 80,000, respectively. After the accounts for the year have been prepared it is discovered that interest at 5% p.a. as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the beginning of the next year. Record the necessary journal entry.

Answer 41: Adjustment of Profit

	Azad	Benny		Total
Interest on Capital	2,000	4,000	=	6,000
Less: Wrong Distribution of Profit ₹ 6,000 (1: 1)	(3,000)	(3,000)	=	(6,000)
Adjusted Profit	(1,000)	(1,000)	=	NIL

Adjusting Journal Entry

Date	Particulars		L.F	Debit Amount₹	Credit Amount₹
	Azad’s Current  A/c	Dr.		1,000
	To Benny’s Current A/c				1,000
	(Adjustment of profit made)

Question 42: Mohan, Vijay and Anil are partners, the balances in their capital accounts being Rs. 30,000, Rs. 25,000 and Rs. 20,000 respectively. In arriving at these figures, the profits for the year ended March 31, 2017 amounting to Rupees 24,000 had been credited to partners in the proportion in which they shared profits. During the year the drawings of Mohan, Vijay and Anil were Rs. 5,000, Rs. 4,000 and Rs. 3,000, respectively. Subsequently, the following omissions were noticed:
(a) Interest on Capital, at the rate of 10% p.a., was not charged.
(b) Interest on Drawings: Mohan Rs. 250, Vijay Rs. 200, Anil Rs. 150 was not recorded in the books.
Record necessary corrections through journal entries.

Answer 42: Interest on Capital shall be calculated on opening capital.

The solution to this question is as follows:

	Mohan	Vijay	Anil
Closing Capital	30,000	25,000	20,000
Add: Drawings	5,000	4,000	3,000
Less: Profit (1:1:1)	(8,000)	(8,000)	(8,000)
Opening Capital	27,000	21,000	15,000

Interest on Capital

Mohan = 27,000 ×	10	= ₹ 2,700
	100

Vijay = 21,000 ×	10	= ₹ 2,100
	100

Anil = 15,000 ×	10	= ₹ 1,500
	100

Adjustment of Profit

	Mohan	Vijay	Anil		Total
Interest on Capital (on Opening Capital)	2,700	2,100	1,500		6,300
Interest on Drawings	(250)	(200)	(150)		(600)
	2,450	1,900	1,350		5,700
Wrong Distribution	(1,900)	(1,900)	(1,900)	=	(5,700)
	550	NIL	(550)

Adjusting Journal Entry

Date	Particulars		L.F	Debit Amount₹	Credit Amount₹
	Anil’s Capital A/c	Dr.		550
	To Vijay’s Capital A/c				550
	(Adjustment of profit made)

Question 43: Anju, Manju and Mamta are partners whose fixed capitals were Rs 10,000, Rs 8,000 and Rs 6,000, respectively. As per the partnership agreement, there is a provision for allowing interest on capitals @ 5% p.a. but entries for the same have not been made for the last three years. The profit sharing ratio during there years remained as follows:

Year	Anju	Manju	Mamta
2016	4	3	5
2017	3	2	1
2018	1	1	1

Make necessary and adjustment entry at the beginning of the fourth year i.e. April 2019.

Answer 43: Interest on Capital 

Anuj = 10000 × \(\frac{5}{100}\) = Rs 500

Manju = 8000 × \(\frac{5}{100}\) = Rs 400

Mamta = 6000 × \(\frac{5}{100}\) = Rs 30

Adjustment of profit

Year 2016

	Anuj	Manju	Mamta	=	Total
Interest on Capital	500	400	300		1,200
Wrong distribution of Rs 1,200 (4:3:5)	(400)	(300)	(500)	=	(1,200)
	100	100	(200)		NIL

Year 2017

	Anuj	Manju	Mamta	=	Total
Interest on Capital	500	400	300		1,200
Wrong distribution of Rs 1,200 (3:2:1)	(600)	(400)	(200)	=	(1,200)
	(100)	NIL	100		NIL

Year 2018

	Anuj	Manju	Mamta	=	Total
Interest on Capital	500	400	300		1,200
Wrong distribution of Rs 1,200 (1:1:1)	(400)	(400)	(400)	=	(1,200)
	100	NIL	(100)		NIL

Final Adjustment

	Anuj	Manju	Mamta
2014	100	100	(200)
2015	(100)	NIL	100
2016	100	NIL	(100)
	100	100	(200)

Adjusting Journal Entry

Date	Particulars		L.F	Debit (₹)	Credit (₹)
April 2017	Mamta’s Capital A/c    …Dr.			200
	To Anuj’s Capital A/c				100
	To Manju Capital A/c				100
	(Adjustment of profit made)