Following is the extract of the Balance Sheet of Neelkant and Mahadev as at March 31, 2020: **Balance Sheet as at March 31, 2020** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | 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 Appropriation (March 2017) | 8,00,000 | | | | **Total** | **30,00,000** | **Total** | **30,00,000** | During the year Mahadev's drawings were ₹30,000. Profits during 2019-20 is ₹10,00,000. Calculate interest on capital @ 5% p.a. for the year ending March 31, 2020.

Following is the extract of the Balance Sheet of Neelkant and Mahadev as at March 31, 2020: **Balance Sheet as

Numerical Questions · Q17

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

Balance Sheet as at March 31, 2020

Liabilities	Amount (₹)	Assets	Amount (₹)
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 Appropriation (March 2017)	8,00,000
Total	30,00,000	Total	30,00,000

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

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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)

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Interest on capital for both partners is calculated on the fixed capital balances of ₹10,00,000 each at 5% p.a. for the full year, giving ₹50,000 each. The current account balances and the profit-and-loss appropriation balance do not affect this calculation.

The question gives you an extract of the balance sheet showing fixed capitals — Neelkant ₹10,00,000 and Mahadev ₹10,00,000 — plus their current accounts and a Profit and Loss Appropriation balance. The key point: when capitals are fixed, interest on capital is computed only on the fixed capital amount, not on the current account balance. The current account is a separate record of each partner’s accumulated profits, drawings, and other adjustments; it does not form part of the capital on which interest is paid.

The rule under the Partnership Act and standard accounting treatment is that interest on capital is an appropriation of profit, not a charge against profit. It is calculated for the period the capital remained in the business. Here, both partners’ fixed capitals stayed constant at ₹10,00,000 throughout the year (no mention of any additional introduction or withdrawal of capital). Therefore, interest is computed on the full amount for the entire year.

Mahadev’s drawings of ₹30,000 are irrelevant for interest on capital — drawings affect the current account, not the fixed capital. The Profit and Loss Appropriation balance of ₹8,00,000 (from March 2017) is a past accumulated profit already distributed or held; it does not enter the current year’s interest calculation. The profit for 2019-20 is ₹10,00,000, but that figure is used later for appropriation; interest on capital is computed first, before sharing the remaining profit.

Working Notes

Interest on Neelkant’s Capital

Fixed Capital = ₹10,00,000

Rate = 5% p.a.

Time = 1 year

Interest = ₹10,00,000 × 5/100 = ₹50,000
Interest on Mahadev’s Capital

Fixed Capital = ₹10,00,000

Rate = 5% p.a.

Time = 1 year

Interest = ₹10,00,000 × 5/100 = ₹50,000

No other adjustments are needed. The journal entry to record this appropriation would be:

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