Raman, Manan and Naman were partners sharing profit in the ratio of 2 : 1 : 1. Raman withdrew ₹ 3,000 every mo

Question

Q. Raman, Manan and Naman were partners sharing profit in the ratio of 2 : 1 : 1. Raman withdrew ₹ 3,000 every month and Manan withdrew ₹ 4,000 every month. Interest on drawings @ 6% p.a. was charged whereas the partnership deed was silent about interest on drawings. Showing your working clearly, pass the necessary adjustment entry to rectify the error.

(OR)

Arun and Barun were partners sharing profits in the ratio of 3 : 2. Their capitals were ₹ 50,000 and ₹ 30,000 respectively. Partnership deed provided for interest on capital @ 6% p.a. to Arun and Barun and quarterly salary of ₹ 1,000 to Barun. Arun had given a loan of ₹ 1,00,000 on 1st October, 2021 to the firm without any agreement about interest. For the year 2021 - 22, the profits earned were ₹ 26,800. Prepare Profit and Loss Appropriation Account of the firm for the year ended 31st March, 2022.

CBSECBSE Class XII Board 2023Subjective· 3mImportance★★★★★

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Part (a)Concept understanding — Interest on Drawings

Interest on Drawings – A First Look

Think of a partnership firm as a shared pool of money. Each partner owns a part of that pool, but the firm needs that money to run its business. When a partner takes money out for personal use — buying a car, paying school fees, a holiday — that money is no longer available to the firm. The firm could have earned a return on that money if it had stayed in the business. So the partner is, in effect, borrowing from the firm.

Interest on Drawings is the charge the firm levies on a partner for that personal withdrawal. It compensates the firm for the loss of use of that capital.

The precise meaning

Drawings are any amounts or goods taken by a partner from the firm for personal use. Interest on Drawings is the interest charged by the firm on those drawings. It is an income for the firm and an expense for the partner.

The logic is simple: if the partner had left that money in the firm, the firm could have invested it and earned a return. By taking it out, the partner reduces the firm's capital base. Interest on Drawings restores some of that lost earning potential.

Why does it matter?

In a partnership, profits are shared according to an agreed ratio. But if one partner draws heavily and another draws little, the heavy drawer has effectively used more of the firm's resources. Without interest on drawings, that partner would unfairly benefit — the firm's profit would be lower because less capital was available, and all partners would share that reduced profit equally. Interest on drawings corrects this inequity.

It also encourages partners to withdraw only what they genuinely need, keeping more capital inside the firm for growth.

The accounting treatment

Interest on Drawings is recorded in two steps:

When interest is charged – The firm recognises it as income. The journal entry is:

Partner’s Capital Account (or Current Account) … Dr

To Interest on Drawings Account

The partner’s capital (or current) account is debited because the partner owes this amount to the firm. Interest on Drawings is credited because it is income for the firm.
At the end of the year – The Interest on Drawings Account is closed by transferring its balance to the Profit and Loss Appropriation Account:

Interest on Drawings Account … Dr

To Profit and Loss Appropriation Account

This increases the firm’s profit available for distribution.

Where does it appear in the final accounts?

Interest on Drawings appears in two places:

On the credit side of the Profit and Loss Appropriation Account – as an addition to the net profit.
On the debit side of the Partner’s Capital Account (or Current Account, if the firm maintains separate current accounts).

The NCERT textbook shows the following format for the Profit and Loss Appropriation Account:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Net Profit (transferred)	xxx	By Net Profit (as per P&L)	xxx
To Interest on Capital	xxx	By Interest on Drawings	xxx
To Salary to Partner	xxx
To Commission to Partner	xxx
To Profit transferred to:
– A’s Capital A/c	xxx
– B’s Capital A/c	xxx
Total	xxx	Total	xxx

And in the Partner’s Capital Account (or Current Account), interest on drawings appears on the debit side:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Drawings	xxx	By Balance b/d	xxx
To Drawings	xxx	By Interest on Capital	xxx

Part (b)Concept understanding — Profit Appropriation Account

Profit Appropriation Account – A First Look

Think of a partnership firm as a group of friends who run a business together. At the end of the year, they have earned some profit. But before they split that profit among themselves, they must first settle certain obligations: pay interest on the capital each partner contributed, give a salary to a partner who works full-time, or pay a commission to a partner who brought in a special client. Only after these items are accounted for can the remaining profit be divided.

That is exactly what the Profit Appropriation Account does. It is not a separate ledger account in the double-entry system — it is an extension of the Profit and Loss Account. The Profit and Loss Account shows the net profit (or net loss) of the firm. The Profit Appropriation Account shows how that net profit is appropriated (distributed or allocated) among the partners and to various reserves.

Why does it matter?

Without an appropriation account, you would not know:

How much interest on capital each partner is entitled to.
Whether a partner’s salary or commission has been paid.
How much profit is transferred to the General Reserve.
What remains to be shared as profit among the partners.

In short, it answers the question: “We made Rs 5,00,000 profit — now what happens to it?”

Accounting treatment – the logic

The Profit Appropriation Account is credited with the net profit brought forward from the Profit and Loss Account. Then, all appropriations (interest on capital, partner’s salary, partner’s commission, transfer to reserve) are debited to this account. The balance left after all debits is the divisible profit, which is then credited to the partners’ capital accounts in their profit-sharing ratio.

Important

The Profit Appropriation Account is not a real account — it is a nominal account. It is closed at the end of each year by transferring its balance to the partners’ capital accounts.

The format (as per NCERT Class 12)

Below is the standard proforma. Note that the left side (Dr.) shows all appropriations, and the right side (Cr.) shows the net profit brought in.

Dr.	Profit and Loss Appropriation Account	Cr.
Particulars	Amount (Rs)	Particulars
To Interest on Capital:		By Net Profit (transferred from P&L A/c)
– Partner A	XXX
– Partner B	XXX
To Partner’s Salary (if any)	XXX
To Partner’s Commission (if any)	XXX
To General Reserve	XXX
To Profit transferred to:
– Partner A’s Capital A/c	XXX
– Partner B’s Capital A/c	XXX
Total	XXX	Total

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Part (a)

The deed was silent on interest on drawings, so under the Partnership Act no interest is chargeable - charging it was an error to be reversed. Timing not stated, so use the average period of 6 months.

Interest wrongly charged: Raman ₹3,000 x 12 x 6% x 6/12 = ₹1,080; Manan ₹4,000 x 12 x 6% x 6/12 = ₹1,440; Naman = 0. Total = ₹2,520 (this was wrongly added to profit and shared 2:1:1).

Partner	Interest reversed (Cr)	Profit share reversed (Dr)	Net
Raman	1,080	1,260	180 Dr
Manan	1,440	630	810 Cr
Naman	0	630	630 Dr

Particulars	Debit (₹)	Credit (₹)
Raman's Capital A/c Dr.	180
Naman's Capital A/c Dr.	630
To Manan's Capital A/c		810

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Part (a): rectify wrongly-charged interest on drawings - Raman's Capital Dr ₹180, Naman's Capital Dr ₹630, Manan's Capital Cr ₹810. Part (b): P&L Appropriation A/c totals ₹23,800; Arun ₹9,000 and Barun ₹6,000 of divisible profit.

Part (a)

When the deed is silent, no interest on drawings can be charged. The firm's error had two effects: (1) it debited Raman and Manan with interest, and (2) it inflated the distributable profit by that interest, which was then shared 2:1:1. Both must be reversed.

Interest (average period 6 months, timing not stated):

Raman: ₹36,000 x 6% x 6/12 = ₹1,080
Manan: ₹48,000 x 6% x 6/12 = ₹1,440
Total wrongly credited to profit = ₹2,520; shared 2:1:1 -> Raman ₹1,260, Manan ₹630, Naman ₹630.

Partner	(i) Interest reversed - credit	(ii) Extra profit reversed - debit	Net effect
Raman	1,080	1,260	Dr 180
Manan	1,440	630	Cr 810
Naman	0	630	Dr 630

Totals balance: Dr 180 + 630 = 810 = Cr 810.

Particulars	Debit (₹)	Credit (₹)
Raman's Capital A/c Dr.	180
Naman's Capital A/c Dr.	630
To Manan's Capital A/c		810

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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 74 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. (a) Reena and Teena were partners in a firm sharing profits and losses in the ratio of 2 : 1. Teena withdrew ₹ 20,000 at the beginning of each month during the year ended 31st March, 2025. Interest on drawings was to be charged @ 6% per annum. Interest on Teena's drawings for the year ended 31st March, 2025 will be : (A) ₹ 7,800 (B) ₹ 7,200 (C) ₹ 9,600 (D) ₹ 6,600$
(OR)
$(b) Rohan and Sohan were partners in a firm sharing profits and losses equally. Rohan withdrew ₹ 15,000 at the beginning of each quarter during the year ended 31st March, 2025. Interest on Rohan's drawings will be calculated for an average period of : (A) 6 months (B) 4½ months (C) 7½ months (D) 6½ months$
›Reveal solutionSolution
Part (a): Interest on Teena's drawings = Rs.7,800 -> (A). Part (b): Average period for beginning-of-quarter drawings = 7.5 months -> (C).

Part (a)

Equal amount at the beginning of every month => average period 6.5 months.

Total drawings = 20,000 x 12 = Rs.2,40,000 …
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CBSE 2026Set 67/5/11 markMCQ
$Q. Arora and Gurmeet were partners in a firm sharing profits and losses in the ratio of 3 : 2. Starting from 1st October, 2024 Arora withdrew ₹ 30,000 at the beginning of each quarter for his personal use. Interest on drawings was to be charged @ 12% per annum. Interest on Arora’s drawings for the year ended 31st March, 2025 was : (A) ₹ 1,800 (B) ₹ 2,700 (C) ₹ 450 (D) ₹ 3,600$
›Reveal solutionSolution
Interest on Arora's drawings for the year ended 31st March, 2025 is ₹2,700 (Option B).

Concept: Interest on Drawings

When a partner withdraws money from the firm for personal use, the firm loses the opportunity to earn on that capital. To compensate, interest on drawings is charged to the partner's capital account and credited to the Profit & Loss Appropriation Account (it is an income for the firm).

The accounting treatment follows the rule:

Partner's Capital/Current A/c Dr. (reduces the partner's claim)

To Interest on Drawings A/c (or directly to P&L Appropriation A/c)

When drawings are made at regular intervals (monthly, quarterly, etc.), we use the average period formula to calculate interest, rather than computing interest on each withdrawal separately.

Understanding the Time Period

Arora withdraws ₹30,000 at the beginning of each quarter starting 1st October, 2024 until the year-end 31st March, 2025. This financial year runs for 6 months (October 2024 to March 2025).

The quarters in this period are:

1st October, 2024 – withdrawal for 6 months (Oct to Mar)

1st January, 2025 – withdrawal for 3 months (Jan to Mar)

So only two withdrawals occur during the year.

For equal periodic withdrawals, the average period formula is:
$\text{Average Period} = \frac{\text{Total time period} + \text{Time of last withdrawal}}{2}$
Here:

Total time period = 6 months (from first withdrawal on 1 Oct to year-end 31 Mar)

Time of last withdrawal = 3 months (from 1 Jan to 31 Mar)

$\text{Average Period} = \frac{6 + 3}{2} = \frac{9}{2} = 4.5 \text{ months}$
Tip

When drawings are made at the beginning of each period, the average period is calculated from the first withdrawal date to year-end, then averaged with the last withdrawal period. This accounts for the fact that early withdrawals remain outside the firm longer.

Solution

Working Note 1: Calculation of Interest on Drawings

Total drawings by Arora = ₹30,000 × 2 = ₹60,000

Interest on drawings:

$\text{Interest} = \text{Total Drawings} \times \frac{\text{Rate}}{100} \times \frac{\text{Average Period}}{12}$ …
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CBSE 2026Set MARCH1 markMCQ
$Q. What is the interest on partner's capital for a partner?$
(a) An expense
(b) Liability
(c) Income
(d) Loss
›Reveal solutionSolution

From a partner's viewpoint, interest on capital is income; the correct option is (c).

Interest on capital is calculated on the balance a partner keeps invested in the firm and is allowed only when the partnership deed permits it. In the firm's books it is an appropriation of profit (debited to the Profit and Loss Appropriation Account, not a business expense). But the question asks about the posit …

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CBSE 2026Set MARCH1 markMCQ
$Q. Interest on capital is credited to the ______ Account.$
(a) Profit and Loss Account
(b) Partner's Capital Account
(c) Profit and Loss Appropriation Account
(d) Revaluation account
›Reveal solutionSolution

Interest on capital is credited to the Partner's Capital Account — option (b).

In a Kerala Plus Two (DHSE) Accountancy partnership problem, interest on capital is an appropriation of profit. It rewards a partner for the money he has kept invested in the firm, so it must be given to that partner. The double entry is:

Account Debit Credit
Profit and Loss Appropriation A/c ✓
Partner's Capital A/c (or Current A/c) ✓
…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. If Asha makes drawings of ₹ 4,000 at the end of each months and interest on drawings is charged @ 8% per annum. The period for interest on drawings will be A) 7 1/2 months B) 5 1/2 months C) 6 1/2 months D) 4 1/2 months$
›Reveal solutionSolution

For equal monthly drawings made at the END of each month, the average period for interest on drawings is 5 1/2 months, so option (B) is correct. This is a standard RBSE Rajasthan / Class-12 Accountancy interest-on-drawings question.

When a partner withdraws an equal amount at the end of every month for a full year, the first drawing stays invested (outstanding) for 11 months and the last drawing for 0 months. Using the average-period method:

Average period = (period of first drawing + period of last drawing) / 2 = (11 + 0) / 2 = 5.5 months

…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Which one of the following item is related to credit side of Profit and Loss Appropriation Account? A) Interest on partners' capital B) Interest on partners' loans C) Interest on partners' drawings D) Salary paid to partners$
›Reveal solutionSolution
Interest on partners' drawings is income FOR the firm, so it is credited to the Profit and Loss Appropriation Account — option (C) is correct.

The Profit and Loss Appropriation Account shows how net profit is distributed among partners:

Debit side: interest on capital, salary/commission to partners, transfer to reserve, share of profit to partners.

Credit side: net profit brought down from the P&L Account and interest on partners' drawings (recovered from partners). …
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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: The amount of interest on capital is shown in __________ side of Profit and Loss Appropriation Account. (Credit/Debit)$
›Reveal solutionSolution

Interest on capital is shown on the DEBIT side of the Profit and Loss Appropriation Account.

The Profit and Loss Appropriation Account distributes the net profit. Items that give/allow amounts to partners - interest on capital, salary or commission to partners, and their share of profit - are debited, while net profit and interest on drawings are credited. Interest on capital, being an allowance …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. When time of withdrawals is not mentioned, interest on drawing is charged for$
(a) 5½ months
(b) 6 months
(c) 6½ months
(d) 12 months
›Reveal solutionSolution

If the time of drawings is not given, interest is charged for 6 months - option (b).

When the amounts and dates of a partner's drawings are not specified, it is assumed that the drawings were spread evenly over the whole year. The average period for which the money remained withdrawn is therefor …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. A partner withdrew ₹ 10,000 each on 1st January and 1st July. Interest on his drawings @ 10% p.a on 31st December, 2024 will be _______.$
(a) ₹ 500
(b) ₹ 1000
(c) ₹ 1250
(d) ₹ 1500
(a) ₹ 500
(b) ₹ 1000
(c) ₹ 1250
(d) ₹ 1500
›Reveal solutionSolution

Interest on drawings = ₹ 1,500 (Option D).

Interest on drawings @10% p.a. is calculated separately on each withdrawal, from the date of withdrawal to the end of the accounting year (31st December, 2024):

Drawing Amount Period outstanding (to 31 Dec) Interest @10% p.a.
1st January ₹10,000 12 months ₹10,000 × 10% × 12/12 = ₹1,000

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Rita and Usha were partners in a firm sharing profits and losses in the ratio of 3 : 5. During the year, Usha withdrew ₹15,000 at the end of each month. Interest on drawings is to be charged @ 8% p.a. The average period for the calculation of interest on drawings will be$
(a) 4½ months
(b) 6 months
(c) 6½ months
(d) 5½ months
›Reveal solutionSolution
Drawings made at the end of every month carry an average period of 5½ months (not 6 or 6½), because the very last withdrawal (end of March) earns no interest at all.

When interest on drawings is charged using the average period (product) method, the formula depends on exactly when during each period the partner withdraws money:

Drawings at the beginning of every month → average period = (12 + 1)/2 = 6½ months

Drawings at the middle of every month → average period = 6 months

Drawings at the end of every month → average period = (12 − 1)/2 = 5½ months

Here, Usha withdrew ₹15,000 "at the end of each month." The first withdrawal (end of April, say) is outstanding for 11 months by the close of the accounting year (31st March); the last withdrawal (end of March) is outstanding for 0 months. The average of this evenly-spaced series (11, 10, 9, …, 1, 0) is (11+0)/2 = 5.5 months.

…
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CBSE 2026Set ANNUAL1 markMCQ
$Q. Or. Abha, Manju and Rhea were partners in a firm sharing profits and losses in the ratio of 3 : 3 : 4. During the year ended 31st March, 2024, Rhea withdrew ₹30,000 at the beginning of each half-year. Interest on Rhea's drawings @ 10% p.a. for the year ended 31st March, 2024 will be$
(a) ₹6,000
(b) ₹4,500
(c) ₹3,000
(d) ₹1,500
›Reveal solutionSolution
With two equal half-yearly drawings at the start of each half, interest works out to ₹4,500 using an average outstanding period of 9 months.

Rhea withdrew ₹30,000 at the beginning of each half-year, i.e., twice during the year:

1st withdrawal: 1st April, 2023 → outstanding for the full 12 months till 31st March, 2024

2nd withdrawal: 1st October, 2023 → outstanding for 6 months till 31st March, 2024

Average period = (12 + 6)/2 = 9 months

Total drawings during the year = ₹30,000 × 2 = ₹60,000

Interest on Drawings = Total Drawings × Rate × Average Period/12

= ₹60,000 × 10% × 9/12

= ₹60,000 × 0.10 × 0.75

= ₹4,500

…
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CBSE 2026Set ANNUAL1 mark
$Q. Why is Profit and Loss Appropriation A/c prepared?$
›Reveal solutionSolution
The P&L Appropriation A/c exists to distribute the firm's net profit among partners exactly as the partnership deed directs, item by item.

An ordinary Profit and Loss Account only determines the firm's overall net profit (or loss) for the year from its trading and other operations — it does not concern itself with how that profit is to be shared among the partners. But in a partnership, the deed often entitles individual partners to specific extra benefits before the residual profit is shared, such as:

Interest on partners' capital

Salary or commission to working partners

Interest charged on partners' drawings (this reduces the amount available, since it is added back as income to the firm)

The remaining (residual) profit shared in the agreed profit-sharing ratio

The Profit and Loss Appropriation Account is prepared, immediately after the P&L Account, specifically to carry out this distribution — it is credited with the net profit (brought down from the P&L A/c) and interest on drawings, and debited with interest on capital, partners' salary/commission, and finally the balance (residual profit) transferred to the partners' capital/current accounts in their profit-sharing ratio.

…
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Account	Debit	Credit
Profit and Loss Appropriation A/c	✓
Partner's Capital A/c (or Current A/c)		✓
…

Part (a)

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