Keshav and Karan were partners in a firm sharing profits equally. The capitalised value of average profits of

Question

Q. Keshav and Karan were partners in a firm sharing profits equally. The capitalised value of average profits of the firm was ₹ 18,00,000. Assets of the firm were ₹ 20,00,000 (excluding goodwill) and Liabilities were ₹ 5,00,000. The value of goodwill of the firm by capitalisation of average profits method will be : (A) ₹ 2,00,000 (B) ₹ 3,00,000 (C) ₹ 4,00,000 (D) ₹ 3,50,000

(OR)

A and B were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April, 2021 the balances in their capital accounts were ₹ 1,50,000 and ₹ 2,00,000 respectively. The partnership deed provided that interest on partners capital will be allowed @ 10% per annum. During the year ended 31st March, 2022, the firm incurred a loss of ₹ 10,000. Interest on A's capital will be : (A) ₹ 15,000 (B) ₹ 9,000 (C) Nil (D) ₹ 6,000

CBSECBSE Class XII Board 2023MCQ· 1mImportance★★★★★

✓ Free question

Concept understanding — Super Profit Method

The Super Profit Method: From Everyday Intuition to Exam-Ready Knowledge

Think about two shops in your neighbourhood. One is an old, trusted general store that has been running for 20 years. The other is a brand-new supermarket that opened last month. Both sell groceries. Both have the same amount of money invested (say, ₹10 lakh each). But the old store earns ₹2 lakh profit every year, while the new one earns only ₹1.5 lakh.

Why the difference? The old store has loyal customers, a prime location, a good reputation, and experienced staff. These are intangible assets — not physical like a building or machinery, but valuable nonetheless. In accounting, we call this extra earning power Goodwill.

The Super Profit Method is one way to calculate the value of this Goodwill. It answers the question: How much extra profit does the business earn compared to what a normal business with the same investment would earn?

What Exactly is "Super Profit"?

Let's break it down step by step.

Normal Profit is the profit that an average business in the same industry would earn on its capital employed. For example, if the normal rate of return in the grocery business is 15%, then on a capital of ₹10 lakh, the normal profit would be:

Normal Profit = Capital Employed × Normal Rate of Return

= ₹10,00,000 × 15/100 = ₹1,50,000

Actual Profit is what the business actually earns. In our old store's case, it's ₹2,00,000.

Super Profit is the difference:

Super Profit = Actual Profit − Normal Profit

= ₹2,00,000 − ₹1,50,000 = ₹50,000

This ₹50,000 is the extra profit the business earns because of its goodwill. The Super Profit Method values goodwill as a multiple of this super profit.

Important

Goodwill = Super Profit × Number of Years' Purchase

The "number of years' purchase" is a multiplier agreed upon by the parties (usually 2 to 5 years). It reflects how many years of extra profit the buyer is willing to pay for.

Why Does This Method Matter?

In Class 12, you encounter this method in two main situations:

When a new partner is admitted into a firm. The existing partners have built the goodwill over time. The new partner must compensate them for it.
When a partner retires or dies. The outgoing partner is entitled to their share of the firm's goodwill.

The Super Profit Method is preferred when the firm's profits are stable and predictable. It's more objective than the Average Profit Method because it explicitly accounts for what a "normal" business would earn.

The Accounting Treatment: Which Account is Debited and Credited?

When a new partner brings in their share of goodwill (in cash), the journal entry is:

Particulars	L.F.	Debit (₹)	Credit (₹)
Cash/Bank A/c	Dr.	xxx
To Goodwill A/c			xxx
(Being goodwill brought in by the new partner)

Then, the goodwill amount is distributed among the old partners in their sacrificing ratio (the ratio in which they have given up their share of profit):

Particulars	L.F.	Debit (₹)	Credit (₹)
Goodwill A/c	Dr.	xxx
To Old Partner 1's Capital A/c			xxx
To Old Partner 2's Capital A/c			xxx
(Being goodwill credited to old partners in sacrificing ratio)

Watch out

A common mistake: Students often debit the new partner's capital account directly. That is wrong. The new partner brings cash, which goes to the bank. Goodwill is a separate account that is then distributed.

The Proforma: Partners' Capital Account

When goodwill is adjusted through capital accounts (without bringing cash), the format in your NCERT textbook looks like this:

Partners' Capital Accounts

Particulars	Old Partner 1 (₹)	Old Partner 2 (₹)	New Partner (₹)	Particulars	Old Partner 1 (₹)	Old Partner 2 (₹)	New Partner (₹)
To Goodwill A/c (new partner's share)	—	—	xxx	By Balance b/d	xxx	xxx	xxx
To Balance c/d	xxx	xxx	xxx	By Goodwill A/c (old partners' share)	xxx	xxx	—
Total	xxx	xxx	xxx	Total	xxx	xxx	xxx

Notice: The new partner's capital account is debited with their share of goodwill (because they are paying for it), and the old partners' capital accounts are credited with their respective shares (because they are receiving it).

A Worked Example (NCERT-Style)

Suppose A and B are partners sharing profits in the ratio of 3:2. Their capital employed is ₹5,00,000. The normal rate of return is 10%. The average profit of the last 3 years is ₹80,000. They admit C as a new partner. Goodwill is valued at 3 years' purchase of super profit.

Step 1: Calculate Normal Profit

Normal Profit = ₹5,00,000 × 10/100 = ₹50,000

Step 2: Calculate Super Profit

Super Profit = ₹80,000 − ₹50,000 = ₹30,000

Step 3: Calculate Goodwill

Goodwill = ₹30,000 × 3 = ₹90,000

If C brings ₹90,000 as his share of goodwill, the journal entries are:

Bank A/c Dr. ₹90,000

To Goodwill A/c ₹90,000
Goodwill A/c Dr. ₹90,000

To A's Capital A/c (3/5) ₹54,000

To B's Capital A/c (2/5) ₹36,000

Tip

Always check: The sacrificing ratio is the same as the old profit-sharing ratio unless otherwise stated. In admission, the old partners sacrifice in their old ratio.

The Bottom Line

The Super Profit Method is not just a formula — it's a way of thinking about what makes a business truly valuable beyond its physical assets. For your exam:

Memorise the formula: Goodwill = Super Profit × Years' Purchase
Know the steps: Normal Profit → Super Profit → Goodwill
Master the journal: Debit Bank, Credit Goodwill; then Debit Goodwill, Credit Old Partners' Capital
Practice the proforma: The Partners' Capital Account format is a sure-shot question

Goodwill = Super Profit × Number of Years' Purchase — this single line, written correctly, can fetch you full marks in a 6-mark question.

(a) Goodwill by capitalisation of average profits = ₹3,00,000 (B). (b) Interest on A's capital in a loss year = Nil (C).

Goodwill = Capitalised value of average profits − Net assets (assets excluding goodwill − outside liabilities).

Net Assets = ₹20,00,000 − ₹5,00,000 = ₹15,00,000.
Goodwill = ₹18,00,000 − ₹15,00,000 = ₹3,00,000.

✓Final answer

(B) ₹3,00,000.

Concept understanding — Partnership Profit Distribution Rules

Partnership Capital Accounting — A First Look

Think of a partnership like a group of friends pooling money to start a roadside food stall. Each friend brings in some cash — that’s their capital. But unlike a simple piggy bank, a partnership needs a clear record of who put in how much, because profits (and losses) are shared in a fixed ratio, and partners may withdraw money, lend extra funds, or take a salary.

That record is what Partnership Capital Accounting is about.

What It Really Means

In accounting, capital is the amount a partner contributes to the firm. But it’s not just a one-time number. Over time, a partner’s capital changes due to:

Additional capital introduced
Drawings (money or goods taken out)
Share of profit or loss
Interest on capital, interest on drawings, partner’s salary, commission

The Capital Account of each partner tracks all these changes. It answers: What does the firm owe to this partner at any point?

Why It Matters

Without proper capital accounting, you cannot:

Determine each partner’s claim on the firm’s assets
Calculate interest on capital correctly
Prepare the Profit and Loss Appropriation Account
Settle accounts when a partner retires or dies

The NCERT textbook emphasises that capital accounts are personal accounts of the partners — they show the firm’s liability towards each partner.

Two Methods of Maintaining Capital Accounts

The NCERT Class 12 Accountancy textbook (Part II, Chapter 2) describes two methods:

1. Fixed Capital Method

Under this method, the capital account remains constant (except when additional capital is introduced or capital is withdrawn permanently). All other transactions — share of profit, drawings, interest, salary — are recorded in a separate Current Account.

Note

In the Fixed Capital Method, the Capital Account shows only the permanent capital. The Current Account shows the fluctuating balance.

2. Fluctuating Capital Method

Here, all transactions are recorded directly in the Capital Account. The capital balance changes every year.

Accounting Treatment — Which Account is Debited/Credited

Let’s take the most common entries. I’ll show the journal entry first, then explain.

Entry 1: Capital Introduced

When a partner brings in cash or assets:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Cash/Bank A/c	Dr.	xxx
	To Partner’s Capital A/c			xxx

Why? Cash comes in (asset increases — debit), and the firm’s liability to the partner increases (capital is a liability — credit).

Entry 2: Drawings

When a partner withdraws cash or goods for personal use:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Partner’s Capital/Current A/c	Dr.	xxx
	To Cash/Bank/Purchases A/c			xxx

Why? The firm’s liability to the partner decreases (debit the capital/current account), and cash or goods go out (credit).

Entry 3: Interest on Capital

This is an appropriation of profit. The formula (as per NCERT) is:

Interest on Capital = Capital × Rate of Time × Time (in months)/12

Journal entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Interest on Capital A/c	Dr.	xxx
	To Partner’s Capital/Current A/c			xxx

Then, at the end of the year, Interest on Capital is transferred to the Profit and Loss Appropriation Account:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Profit and Loss Appropriation A/c	Dr.	xxx
	To Interest on Capital A/c			xxx

Entry 4: Partner’s Salary

If the partnership deed allows a salary:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Salary to Partner A/c	Dr.	xxx
	To Partner’s Capital/Current A/c			xxx

Again, this is transferred to the Profit and Loss Appropriation Account.

Entry 5: Share of Profit

At the end of the year, after all appropriations, the remaining profit is distributed:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Profit and Loss Appropriation A/c	Dr.	xxx
	To Partner’s Capital/Current A/c			xxx

Formats as per NCERT

Format of Capital Account (Fluctuating Method)

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Drawings A/c	xxx	By Balance b/d	xxx
To Interest on Drawings A/c	xxx	By Cash/Bank (additional capital)	xxx
To Balance c/d	xxx	By Interest on Capital A/c	xxx
		By Salary to Partner A/c	xxx
		By Share of Profit A/c	xxx
Total	xxx	Total	xxx

Format of Capital and Current Accounts (Fixed Method)

Capital Account (remains fixed unless permanent change):

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Balance c/d	xxx	By Balance b/d	xxx
		By Cash/Bank (additional capital)	xxx
Total	xxx	Total	xxx

Current Account (records all other transactions):

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Drawings A/c	xxx	By Balance b/d	xxx
To Interest on Drawings A/c	xxx	By Interest on Capital A/c	xxx
To Balance c/d	xxx	By Salary to Partner A/c	xxx
		By Share of Profit A/c	xxx
Total	xxx	Total	xxx

A Common Mistake to Avoid

Watch out

Many students debit the Profit and Loss Account directly for interest on capital or partner’s salary. That is wrong. These are appropriations of profit, not expenses. They go to the Profit and Loss Appropriation Account, not the Profit and Loss Account.

The Big Picture

Partnership Capital Accounting is simply a way to keep track of what the firm owes each partner. The two methods — fixed and fluctuating — are just different ways of organising that record. The NCERT textbook uses both, and you need to be comfortable with both formats.

Start with the intuition: Every partner is both an owner and a creditor of the firm. The capital account shows the owner’s stake; the current account (if used) shows the temporary claims. Once you see that, the debits and credits fall into place.

(a) Goodwill by capitalisation of average profits = ₹3,00,000 (B). (b) Interest on A's capital in a loss year = Nil (C).

Interest on capital is an appropriation of profit, allowed only when there is profit (unless the deed makes it a charge). The firm here incurred a loss of ₹10,000, which is simply shared in 3 : 2; no interest on capital is credited.

Watch out

Do not mechanically compute ₹1,50,000 × 10% = ₹15,000 — check for profit first.

✓Final answer

(C) Nil.

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 105 on this concept.

CBSE 2026Set 67/3/11 markMCQ
$Q. (a) Atul, Bajaj and Madan were partners in a firm sharing profits and losses in the ratio of 1 : 2 : 5. The partnership deed provides that interest on a partner's drawings shall be charged @ 18% per annum. During the year ended 31st March, 2025, Bajaj withdrew ₹ 7,000 at the end of each quarter. Interest on Bajaj's drawings will be : (A) ₹ 1,890 (B) ₹ 3,150 (C) ₹ 420 (D) ₹ 5,040$
(OR)
$(b) Damodar, Rao and Shridharan were partners in a firm sharing profits and losses in the ratio of 3 : 1 : 1. Their fixed capitals were ₹ 4,00,000; ₹ 3,00,000 and ₹ 2,00,000 respectively. Interest on capital is allowed at the rate of 6% per annum. Journal entry for allowing interest on Rao's capital will be : (A) Profit & Loss Appropriation A/c Dr. — Debit ₹ 18,000 | To Rao's Capital A/c — Credit ₹ 18,000 (B) Profit & Loss Appropriation A/c Dr. — Debit ₹ 18,000 | To Rao's Current A/c — Credit ₹ 18,000 (C) Interest on Capital A/c Dr. — Debit ₹ 18,000 | To Rao's Current A/c — Credit ₹ 18,000 (D) Interest on Capital A/c Dr. — Debit ₹ 18,000 | To Rao's Capital A/c — Credit ₹ 18,000$
›Reveal solutionSolution
Part (a): Interest on Bajaj's drawings = ₹1,890 (option A). Part (b): Interest on Rao's capital ₹18,000 debited to Interest on Capital A/c and credited to Rao's Current A/c (option C).

Part (a)

When a fixed amount is withdrawn at equal intervals, interest on drawings is found by the average period method.
$Interest on Drawings = Total Drawings \times Rate \times (Average Period \div 12)$
Working Note

Total drawings = 7,000 × 4 = ₹28,000.

Withdrawal at the end of each quarter: first drawing (30 Jun) has 9 months to run; last drawing (31 Mar) has 0 months. Average period = (9 + 0) ÷ 2 = 4.5 months.

Interest = 28,000 × 18/100 × 4.5/12 = 28,000 × 0.18 × 0.375 = ₹1,890.

✓Final answer
$Part (a): Interest on Bajaj's drawings = ₹1,890 — option (A) .$

Part (b)

Interest on capital is an appropriation of profit. With fixed capitals, the capital account records only permanent capital changes, so every appropriation (interest on capital, salary, share of profit) is routed through the partner's Current Account.

Working Note — Interest on Rao's capital = ₹3,00,000 × 6% = ₹18,000.

Journal Entry

Particulars Dr. (₹) Cr. (₹)
Interest on Capital A/c Dr. 18,000
To Rao's Current A/c 18,000
(Interest allowed on Rao's fixed capital)

Watch out

With fixed capitals, credit the Current account, not the Capital account. Crediting Rao's Capital A/c (option D) would be correct only for fluctuating capitals.

✓Final answer
$Part (b): (C) — Interest on Capital A/c Dr. ₹18,000; To Rao's Current A/c ₹18,000.$
CBSE 2026Set 67/3/11 markMCQ
$Q. Divya and Bholi were partners in a firm sharing profits and losses in the ratio of 3 : 1. On 1st April, 2024, their fixed capitals were ₹ 8,00,000 and ₹ 6,00,000 respectively. On 30th September, 2024, Bholi introduced ₹ 50,000 as additional capital. Partnership deed provided that interest on capital will be allowed @ 12% p.a. Interest on Bholi's capital for the year ended 31st March, 2025 was : (A) ₹ 78,000 (B) ₹ 75,000 (C) ₹ 72,000 (D) ₹ 3,000$
›Reveal solutionSolution
The interest on Bholi's capital for the year ended 31st March, 2025, is ₹75,000.

In a partnership firm, interest on capital is an allowance provided to partners for contributing capital to the business. It is typically calculated at a specified rate on the opening capital balance for the entire accounting period. However, if a partner introduces additional capital during the year, interest is calculated on this additional amount only for the period it remained in the business. This ensures fairness, as partners are compensated for the exact duration their capital was employed by the firm.

Interest on capital is considered an appropriation of profits, not a charge against profits. This means it is allowed only if there are sufficient profits; if profits are less than the total interest on capital, the interest is allowed only to the extent of profits, distributed in the ratio of capital. If there are losses, no interest on capital is allowed.

To calculate Bholi's interest on capital, we need to consider her initial capital and the additional capital introduced, along with the respective periods for which each amount was outstanding.

Solution

The interest on Bholi's capital for the year ended 31st March, 2025 is calculated as follows:

Interest on Initial Capital:

Bholi's initial fixed capital on 1st April, 2024, was ₹6,00,000. This capital remained in the business for the entire financial year (12 months).

Interest = ₹6,00,000 $\times$ 12% $\times$ (12/12) = ₹72,000

Interest on Additional Capital:

Bholi introduced additional capital of ₹50,000 on 30th September, 2024. This means the additional capital was available to the firm from 1st October, 2024, until the end of the financial year, 31st March, 2025. This period is 6 months (October, November, December, January, February, March).

Interest = ₹50,000 $\times$ 12% $\times$ (6/12) = ₹3,000

Total Interest on Bholi's Capital:

Total interest on Bholi's capital for the year is the sum of interest on her initial capital and interest on her additional capital.

Total Interest = ₹72,000 + ₹3,000 = ₹75,000

Watch out

When calculating interest on capital, always ensure you apply the interest rate for the exact period the capital was available to the firm. For additional capital or withdrawals, this means calculating interest only from the date of introduction/withdrawal to the end of the accounting period, or for the period it was present.

Working Notes

Calculation of Interest on Bholi's Initial Capital:

Initial Capital: ₹6,00,000

Rate of Interest: 12% p.a.

Period: 1st April, 2024 to 31st March, 2025 (12 months)

Interest = ₹6,00,000 $\times$ $\frac{12}{100}$ $\times$ $\frac{12}{12}$ = ₹72,000

Calculation of Interest on Bholi's Additional Capital:

Additional Capital: ₹50,000

Date of Introduction: 30th September, 2024

Rate of Interest: 12% p.a.

Period: 1st October, 2024 to 31st March, 2025 (6 months)

Interest = ₹50,000 $\times$ $\frac{12}{100}$ $\times$ $\frac{6}{12}$ = ₹3,000

Total Interest on Bholi's Capital:

Total Interest = Interest on Initial Capital + Interest on Additional Capital

Total Interest = ₹72,000 + ₹3,000 = ₹75,000

✓Final answer
$The interest on Bholi's capital for the year ended 31st March, 2025, is ₹75,000, which corresponds to option (B).$

Particulars	Dr. (₹)	Cr. (₹)
Interest on Capital A/c Dr.	18,000
To Rao's Current A/c		18,000
(Interest allowed on Rao's fixed capital)

CBSE 2026Set 67/4/11 markMCQ

Q. Ankur and Angad were partners in a firm sharing profits and losses in the ratio of 8 : 7. On 1st July, 2024, Angad advanced a loan of ₹ 8,00,000 to the firm. There is no partnership deed. Angad demands interest on loan @ 10% p.a. On 31st March, 2025, the amount of interest on loan due to Angad will be : (A) ₹ 36,000 (B) ₹ 48,000 (C) ₹ 80,000 (D) ₹ 60,000

›Reveal solution

When there is no partnership deed, interest on a partner's loan is allowed at 6% per annum as per the Indian Partnership Act, 1932. For Angad's loan of ₹8,00,000 for 9 months, the interest due is ₹36,000.

In partnership accounting, the absence of a partnership deed is a critical factor. When partners do not have a written agreement, or if the existing deed is silent on a particular matter, the provisions of the Indian Partnership Act, 1932, automatically apply. This Act serves as a default framework to ensure fairness and prevent disputes.

One of the key provisions of this Act, specifically Section 13(d), addresses interest on a partner's loan to the firm. It states that if a partner has advanced a loan to the firm, they are entitled to receive interest on that loan at a rate of 6% per annum. This is a statutory right and overrides any personal demands made by a partner, such as Angad's demand for 10% interest in this case.

Important

When there is no partnership deed, or the deed is silent, the Indian Partnership Act, 1932, applies. As per Section 13(d) of this Act, a partner is entitled to interest on a loan advanced to the firm at 6% per annum.

It is also crucial to understand that interest on a partner's loan is considered a charge against profits, not an appropriation of profits. This means it must be paid whether the firm makes a profit or incurs a loss. It is treated as an expense of the business, similar to interest paid on a loan from an external party, and is debited to the Profit & Loss Account.

Working Notes

Applicable Rate of Interest on Loan:

Since there is no partnership deed, the provisions of the Indian Partnership Act, 1932, apply. As per Section 13(d) of the Act, interest on a partner's loan is allowed at 6% per annum.

Watch out

Angad's demand for 10% p.a. interest is not applicable in the absence of a partnership deed explicitly stating this rate. The statutory rate of 6% p.a. must be followed.
Period for which Interest is Due:

Angad advanced the loan on 1st July, 2024. The accounting period ends on 31st March, 2025.

The period for which interest is due is from 1st July, 2024, to 31st March, 2025.

This duration covers July, August, September, October, November, December, January, February, and March.

Number of months = 9 months.
Calculation of Interest on Angad's Loan:

Loan Amount = ₹8,00,000

Rate of Interest = 6% p.a. (as per Indian Partnership Act, 1932)

Period = 9 months

Interest on Loan = Loan Amount $\times$ Rate $\times$ Period

Interest on Loan = ₹8,00,000 $\times \frac{6}{100} \times \frac{9}{12}$

Interest on Loan = ₹48,000 $\times \frac{9}{12}$

Interest on Loan = ₹4,000 $\times 9$

Interest on Loan = ₹36,000

Solution: Journal Entry for Interest on Loan

The interest on Angad's loan is an expense for the firm and a liability that increases the amount due to Angad. Therefore, the Interest on Angad's Loan Account (an expense account) is debited, and Angad's Loan Account (a liability account) is credited.

Date	Particulars	Debit (₹)	Credit (₹)
2025 March 31	Interest on Angad's Loan A/c	36,000
	To Angad's Loan A/c		36,000
	(Being interest on loan due to Angad for 9 months @ 6% p.a. as per Indian Partnership Act, 1932)
2025 March 31	Profit & Loss A/c	36,000
	To Interest on Angad's Loan A/c		36,000
	(Being interest on Angad's loan transferred to Profit & Loss A/c)

✓Final answer

The amount of interest on loan due to Angad on 31st March, 2025, will be ₹36,000 .

CBSE 2026Set 67/4/11 markMCQ
$Q. A business earned an average profit of ₹ 2,00,000 during the last few years. The value of net assets of the business is ₹ 17,00,000 and the normal rate of return in a similar business is 10%. The value of goodwill of the business by capitalisation of super-profits method will be : (A) ₹ 17,00,000 (B) ₹ 2,00,000 (C) ₹ 3,00,000 (D) ₹ 30,000$
›Reveal solutionSolution

Goodwill under the Capitalisation of Super-Profit Method is ₹ 3,00,000 — calculated as Super Profit (₹ 30,000) divided by the Normal Rate of Return (10%).

We are asked to find goodwill using the Capitalisation of Super-Profit Method. This method is a refinement of the simple capitalisation approach. The core idea is that goodwill represents the excess earning capacity of the business over and above what is considered normal for the industry.

First, understand the logic. A business has net assets worth ₹ 17,00,000. If a similar business earns a normal return of 10% on its investment, then the normal profit for a business of this size would be 10% of ₹ 17,00,000 = ₹ 1,70,000. But our business actually earns an average profit of ₹ 2,00,000. That extra ₹ 30,000 (₹ 2,00,000 – ₹ 1,70,000) is the Super Profit — the profit attributable to goodwill.

Now, the Capitalisation of Super-Profit Method asks: "If this super profit of ₹ 30,000 is the return on goodwill, and the normal rate of return is 10%, then what must be the value of that goodwill?" The answer is found by capitalising the super profit at the normal rate.
$Goodwill = Super Profit / Normal Rate of Return$
Let us now compute each figure step by step.

Working Note 1: Normal Profit

Normal Profit = Value of Net Assets × Normal Rate of Return

Normal Profit = ₹ 17,00,000 × 10/100 = ₹ 1,70,000

Working Note 2: Super Profit

Super Profit = Average Actual Profit – Normal Profit

Super Profit = ₹ 2,00,000 – ₹ 1,70,000 = ₹ 30,000

Working Note 3: Goodwill by Capitalisation of Super-Profit

Goodwill = Super Profit / Normal Rate of Return

Goodwill = ₹ 30,000 / (10/100) = ₹ 30,000 × 100/10 = ₹ 3,00,000

Watch out

A common mistake is to forget that the normal rate of return is applied to the net assets, not to the capital employed or total assets. Also, ensure you divide the super profit by the rate (expressed as a decimal or fraction), not multiply it. Another pitfall is confusing this method with the simple capitalisation method (where goodwill = Capitalised Value of Average Profit – Net Assets). That method gives a different figure (₹ 3,00,000 as well in this case, but the logic is distinct).

Tip

A quick check: If the super profit is ₹ 30,000 and the normal return is 10%, then the capital that would generate ₹ 30,000 at 10% is simply ₹ 30,000 × 10 = ₹ 3,00,000. This is because 10% of the capital = super profit, so capital = super profit × (100/10).

Therefore, the value of goodwill is ₹ 3,00,000.

✓Final answer
$The goodwill of the business under the Capitalisation of Super-Profit Method is ₹ 3,00,000, which corresponds to option (C).$
CBSE 2026Set 67/4/11 markMCQ
$Q. Anita and Priyal were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April, 2024, their capital accounts showed balances of ₹ 3,00,000 and ₹ 4,00,000 respectively. The partnership deed provided for interest on capital @ 8% p.a. The firm earned a profit of ₹ 28,000 for the year ended 31st March, 2025. Interest on capital allowed to Anita and Priyal was : (A) Anita ₹ 24,000, Priyal ₹ 32,000 (B) Anita ₹ 16,000, Priyal ₹ 12,000 (C) Anita ₹ 12,000, Priyal ₹ 16,000 (D) Anita ₹ 16,800, Priyal ₹ 11,200$
›Reveal solutionSolution
When the available profit is less than the total interest on capital due, the interest on capital is restricted to the available profit and distributed among partners in the ratio of their individual interest entitlements. For Anita and Priyal, the interest on capital allowed will be ₹12,000 and ₹16,000 respectively.

In partnership accounting, the treatment of interest on capital is a crucial concept, especially when the firm's profit is insufficient to cover the full amount of interest. Interest on capital is generally considered an appropriation of profit, not a charge against profit. This means it is paid only if there are profits, and only to the extent of available profits.

Here's the rule:

If the partnership deed provides for interest on capital, but it does not explicitly state that interest on capital is a charge against profits (meaning it must be paid even if it results in a loss), then it is treated as an appropriation. In such cases, if the total amount of interest on capital due to all partners exceeds the net profit available for appropriation, the interest on capital is restricted to the available profit. This available profit is then distributed among the partners in the ratio of their individual interest on capital entitlements.

Let's apply this concept to the given problem.

Working Notes

Calculation of Anita's full Interest on Capital:

Anita's Capital = ₹3,00,000

Interest Rate = 8% p.a.

Full Interest on Capital for Anita = ₹3,00,000 $\times$ 8/100 = ₹24,000

Calculation of Priyal's full Interest on Capital:

Priyal's Capital = ₹4,00,000

Interest Rate = 8% p.a.

Full Interest on Capital for Priyal = ₹4,00,000 $\times$ 8/100 = ₹32,000

Total full Interest on Capital:

Total full Interest on Capital = Anita's Interest + Priyal's Interest

Total full Interest on Capital = ₹24,000 + ₹32,000 = ₹56,000

Comparison with Available Profit:

Firm's Profit for the year = ₹28,000

Total full Interest on Capital = ₹56,000

Since the firm's profit (₹28,000) is less than the total full interest on capital (₹56,000), the interest on capital will be restricted to the available profit of ₹28,000.

Watch out

A common mistake is to simply pay the full interest on capital, which would result in a loss for the firm. Interest on capital is an appropriation, not a charge, unless the deed explicitly states otherwise. Therefore, it cannot exceed the available profit.

Ratio for distributing restricted Interest on Capital:

The available profit of ₹28,000 will be distributed between Anita and Priyal in the ratio of their full interest on capital entitlements.

Ratio of full Interest on Capital = Anita : Priyal

Ratio = ₹24,000 : ₹32,000

Simplifying the ratio by dividing both sides by 8,000:

Ratio = 3 : 4

Calculation of Interest on Capital allowed to Anita:

Anita's share of restricted Interest on Capital = Available Profit $\times$ (Anita's Ratio Share / Total Ratio Share)

Anita's share = ₹28,000 $\times$ (3 / (3+4))

Anita's share = ₹28,000 $\times$ (3/7) = ₹12,000

Calculation of Interest on Capital allowed to Priyal:

Priyal's share of restricted Interest on Capital = Available Profit $\times$ (Priyal's Ratio Share / Total Ratio Share)

Priyal's share = ₹28,000 $\times$ (4 / (3+4))

Priyal's share = ₹28,000 $\times$ (4/7) = ₹16,000

Based on these calculations, the interest on capital allowed to Anita is ₹12,000 and to Priyal is ₹16,000. This corresponds to option (C).

✓Final answer
$The interest on capital allowed to Anita is ₹12,000 and to Priyal is ₹16,000, which corresponds to option (C).$
CBSE 2026Set 67/5/11 markMCQ
$Q. Mansi and Uma were partners in a firm and their capitals were ₹ 4,00,000 and ₹ 2,00,000 respectively. Normal rate of return in a similar business was 15% and the goodwill of the firm was valued at ₹ 4,00,000. If goodwill was calculated at four years purchase of super profits, the average profits of the firm were : (A) ₹ 90,000 (B) ₹ 60,000 (C) ₹ 1,00,000 (D) ₹ 1,90,000$
›Reveal solutionSolution

The average profit is ₹ 1,90,000, which corresponds to option (D).

This is a straightforward application of the Super Profit Method of goodwill valuation. The logic is simple: goodwill is the price paid for earning profits above the normal level. The question gives you the goodwill, the normal rate of return, and the capital employed — you work backwards to find the average profit.

Step 1: Understand the formula chain.

Goodwill under the Super Profit Method is calculated as:

Goodwill = Super Profit × Number of Years' Purchase

And Super Profit itself is:

Super Profit = Average Profit – Normal Profit

So if we know goodwill and the number of years' purchase, we can find the super profit. Then, using the normal profit, we can find the average profit.

Step 2: Calculate Normal Profit.

Normal profit is the return a similar business would earn on the capital invested. Here, the total capital employed is the sum of the partners' capitals:

Total Capital = ₹ 4,00,000 (Mansi) + ₹ 2,00,000 (Uma) = ₹ 6,00,000

Normal Rate of Return = 15%

Therefore:

Normal Profit = 15% of ₹ 6,00,000 = ₹ 90,000

Step 3: Calculate Super Profit.

We are told goodwill is ₹ 4,00,000 and it was calculated at four years' purchase of super profits.

Using the formula:

Goodwill = Super Profit × Number of Years' Purchase

₹ 4,00,000 = Super Profit × 4

Super Profit = ₹ 4,00,000 / 4 = ₹ 1,00,000

Step 4: Calculate Average Profit.

Now we use the super profit formula:

Super Profit = Average Profit – Normal Profit

₹ 1,00,000 = Average Profit – ₹ 90,000

Average Profit = ₹ 1,00,000 + ₹ 90,000 = ₹ 1,90,000

Watch out

A common mistake is to forget that the capital employed is the total of both partners' capitals, not just one. Also, ensure you divide goodwill by the number of years' purchase, not multiply.

Tip

You can solve this in one step: Average Profit = (Goodwill / Years' Purchase) + Normal Profit. Here, that's (₹ 4,00,000 / 4) + ₹ 90,000 = ₹ 1,00,000 + ₹ 90,000 = ₹ 1,90,000.

✓Final answer
$The average profits of the firm were ₹ 1,90,000, which corresponds to option (D).$
CBSE 2026Set 67/5/11 markMCQ
$Q. Munna and Sonu were partners in a firm sharing profits and losses in the ratio of 4 : 1. Their fixed capitals were ₹ 40,00,000 and ₹ 30,00,000 respectively. During the year ended 31st March, 2025, Munna withdrew ₹ 50,000 for personal use. Interest on drawings was to be charged @ 6% p.a. The journal entry for charging interest on Munna’s drawings will be : (A) Interest on Drawings A/c Dr. — Debit ₹ 1,500 | To Munna’s Capital A/c — Credit ₹ 1,500 (B) Munna’s Capital A/c Dr. — Debit ₹ 1,500 | To Interest on Drawings A/c — Credit ₹ 1,500 (C) Interest on Drawings A/c Dr. — Debit ₹ 1,500 | To Munna’s Current A/c — Credit ₹ 1,500 (D) Munna’s Current A/c Dr. — Debit ₹ 1,500 | To Interest on Drawings A/c — Credit ₹ 1,500$
›Reveal solutionSolution
Munna's Current A/c Dr. ₹1,500 | To Interest on Drawings A/c Cr. ₹1,500 — the correct entry is (D).

Concept: Interest on Drawings in a Partnership

When a partner withdraws money for personal use, the partnership charges interest on those drawings to compensate the firm for the loss of capital employed. This interest is an appropriation of profit (not a charge against profit like interest on a loan), meaning it reduces the partner's share of distributable profit.

Accounting Treatment

The entry for charging interest on drawings involves two steps conceptually, though in practice we often combine them:

Interest on Drawings Account is credited (it is an income to the firm, increasing the pool available for appropriation).

The partner's account is debited (the partner owes this amount to the firm; it reduces his claim).

Because the firm maintains fixed capital accounts (capitals are ₹40,00,000 and ₹30,00,000 and remain unchanged), all adjustments for interest, salary, drawings, and profit shares flow through the Current Accounts of the partners. The fixed capital method keeps the Capital Account static; the Current Account is the working account that absorbs all operational adjustments.

Thus the journal entry is:

Partner's Current A/c Dr.

To Interest on Drawings A/c

This debits the partner's Current Account (reducing his balance or increasing his debit balance) and credits Interest on Drawings, which will later be transferred to the Profit & Loss Appropriation Account on the credit side, increasing distributable profit.

Watch out

A common mistake is to debit "Interest on Drawings A/c" thinking it is an expense. Interest on drawings is not an expense; it is an appropriation item (a recovery from the partner). The Interest on Drawings Account is credited, not debited.

Solution

Working Note 1: Calculation of Interest on Drawings

Munna withdrew ₹50,000 during the year ended 31st March, 2025. The question does not specify the date(s) of withdrawal, so we apply the average period method: interest is calculated for an average period of 6 months (half the year).
$\text{Interest on Drawings} = \text{Drawings} \times \frac{\text{Rate}}{100} \times \frac{\text{Time (months)}}{12}$ $= 50{,}000 \times \frac{6}{100} \times \frac{6}{12} = 50{,}000 \times 0.06 \times 0.5 = ₹1{,}500$

Journal Entry for Charging Interest on Munna's Drawings

Date Particulars L.F. Debit (₹) Credit (₹)
31-03-2025 Munna's Current A/c Dr. 1,500
To Interest on Drawings A/c 1,500
(Interest charged on drawings)

The entry debits Munna's Current Account (since fixed capitals are maintained separately) and credits Interest on Drawings Account, which will be closed by transfer to the credit side of the Profit & Loss Appropriation Account.

Tip

When the question states "fixed capitals," always route adjustments (interest on capital, interest on drawings, salary, commission, share of profit/loss) through the Current Account, not the Capital Account. The Capital Account remains untouched except for fresh capital introduced or permanent withdrawal.

✓Final answer
$The correct journal entry is (D) Munna's Current A/c Dr. ₹1,500 | To Interest on Drawings A/c Cr. ₹1,500, because the firm maintains fixed capital accounts and all appropriation adjustments (including interest on drawings) are recorded in the partner's Current Account.$
CBSE 2026Set MARCH1 markMCQ
$Q. The capital proportion of A, B and C is 1:2:3 respectively. The divisible profit is ₹ 1,20,000. What will be the amount of profit of C?$
(a) 60,000
(b) 40,000
(c) 20,000
(d) 50,000
›Reveal solutionSolution

C's share of the 1,20,000 divisible profit in the 1 : 2 : 3 ratio is 60,000, so the answer is (a).

Total of the ratio = 1 + 2 + 3 = 6 parts.

Partner Ratio Share of 1,20,000
A 1/6 20,000
B 2/6 40,000
C 3/6 60,000
Total 6/6 1,20,000

C's profit = 1,20,000 x 3/6 = 60,000.

✓Final answer
$(a) 60,000.$
CBSE 2026Set ANNUAL1 markMCQ
$Q. Interest on capital in the absence of partnership deed :$
(a) 6%
(b) 10%
(c) 12%
(d) is not paid
›Reveal solutionSolution

Correct option: (d) is not paid.

When there is no partnership deed, the Indian Partnership Act, 1932 applies and it allows no interest on partners' capital. Interest on capital is payable only if the deed expressly provides for it. Hence in the absence of a deed, interest on capital is not paid.

✓Final answer
$(d) is not paid.$
CBSE 2026Set ANNUAL1 mark
$Q. If a firm earns a profit of ₹ 50,000 p.a. on an average basis and the normal rate of return is 10% p.a. What will be the capitalised value of average profits?$
›Reveal solutionSolution

Capitalised value of average profits = ₹ 5,00,000.

Capitalised value of a business (on the basis of its average profits) is computed as:

Capitalised Value of Average Profits = Average Profit × (100 / Normal Rate of Return)

Here, Average Profit = ₹50,000 and Normal Rate of Return = 10% p.a.

Capitalised Value = 50,000 × (100/10) = 50,000 × 10 = ₹5,00,000.

(This capitalisation method is commonly used as the basis for valuing goodwill of a firm, where Goodwill = Capitalised Value of Average Profits − Net (Capital Employed) Assets of the firm.)

✓Final answer
$Capitalised value of average profits = ₹ 50,000 / 10% = ₹ 5,00,000.$
CBSE 2026Set ANNUAL1 markMCQ
$Q. Under super profit method, Goodwill is calculated by$
(a) Number of Years' Purchase × Average Profit
(b) Number of Years' Purchase × Super Profit
(c) Super Profit ÷ Normal Rate of Return
(d) Super Profit – Normal Profit
›Reveal solutionSolution
Super Profit Method values Goodwill as: Number of Years' Purchase × Super Profit (not Average Profit, and not the capitalisation-style division used in the Capitalisation of Super Profit Method).

Super Profit = Average Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate of Return. It represents the extra profit the firm earns over and above what any similar business in the same industry would normally earn on the same capital — this "extra earning power" is exactly what goodwill compensates for.

Under the (plain) Super Profit Method:

Goodwill = Super Profit × Number of Years' Purchase

This should not be confused with:

Average Profit Method: Goodwill = Average Profit × Number of Years' Purchase (uses average profit, not super profit).

Capitalisation of Super Profit Method: Goodwill = Super Profit × (100 / Normal Rate of Return) — this is "Super Profit ÷ Normal Rate of Return" expressed as a percentage, a different (though related) valuation approach.

✓Final answer
$Option (b) "Number of Years' Purchase \times Super Profit" — this is the defining formula of the Super Profit Method of goodwill valuation.$
CBSE 2026Set ANNUAL1 mark
$Q. A Firm's average profit is ₹ 5,00,000. The normal rate of return on capital employed of ₹ 40,00,000 is 10%. What is the value of goodwill using three years purchase of super profit ?$
›Reveal solutionSolution

Goodwill (Super Profit Method) = Super Profit × Number of Years' Purchase = ₹1,00,000 × 3 = ₹3,00,000.

Step 1 — Calculate Normal Profit:

Normal Profit = Capital Employed × Normal Rate of Return

= 40,00,000 × 10%

= ₹4,00,000

Step 2 — Calculate Super Profit:

Super Profit = Average Profit − Normal Profit

= 5,00,000 − 4,00,000

= ₹1,00,000

Super profit represents the extra earning capacity of the firm over and above what any similar business would normally earn on the same capital — this "extra" is precisely what goodwill compensates for.

Step 3 — Calculate Goodwill:

Goodwill = Super Profit × Number of Years' Purchase

= 1,00,000 × 3

= ₹3,00,000

This method is considered more scientific than the simple average-profit method because it links goodwill directly to the firm's ABNORMAL earning power rather than its total profit.

✓Final answer
$Value of goodwill (Super Profit Method, 3 years' purchase) = ₹3,00,000.$

Date	Particulars	Debit (₹)	Credit (₹)
31-03-2025	Munna's Current A/c Dr.	1,500
	To Interest on Drawings A/c		1,500
	(Interest charged on drawings)

Partner	Ratio	Share of 1,20,000
A	1/6	20,000
B	2/6	40,000
C	3/6	60,000
Total	6/6	1,20,000

Concept understanding — Super Profit Method

The Super Profit Method: From Everyday Intuition to Exam-Ready Knowledge

What Exactly is "Super Profit"?

Why Does This Method Matter?

The Accounting Treatment: Which Account is Debited and Credited?

The Proforma: Partners' Capital Account

A Worked Example (NCERT-Style)

The Bottom Line

Concept understanding — Partnership Profit Distribution Rules

Partnership Capital Accounting — A First Look

What It Really Means

Why It Matters

Two Methods of Maintaining Capital Accounts

1. Fixed Capital Method

2. Fluctuating Capital Method

Accounting Treatment — Which Account is Debited/Credited

Entry 1: Capital Introduced

Entry 2: Drawings

Entry 3: Interest on Capital

Entry 4: Partner’s Salary

Entry 5: Share of Profit

Formats as per NCERT

Format of Capital Account (Fluctuating Method)

Format of Capital and Current Accounts (Fixed Method)

A Common Mistake to Avoid

The Big Picture

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