Mohan, Vijay and Anil are partners, the balances in their capital accounts being Rs. 30,000, Rs. 25,000 and Rs

Numerical Questions · Q42

Q. 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.

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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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The capital balances given (₹30,000; ₹25,000; ₹20,000) are the balances after the year's profit of ₹24,000 was credited and the drawings were debited. Because no profit-sharing ratio is stated, the profit was shared equally (the default under the Indian Partnership Act, 1932). Interest on capital, however, must be charged on the opening capital, so we first recover each opening capital and then pass one adjustment entry for the net effect of the two omitted items.

Step 1 — Opening capital = Closing capital − Share of profit (₹24,000 ÷ 3 = ₹8,000 each) + Drawings:

Partner	Closing (₹)	− Profit share (₹)	+ Drawings (₹)	Opening (₹)
Mohan	30,000	8,000	5,000	27,000
Vijay	25,000	8,000	4,000	21,000
Anil	20,000	8,000	3,000	15,000

Step 2 — The two omitted items. Interest on capital @ 10% on the opening capital (a credit to each partner): Mohan ₹2,700, Vijay ₹2,100, Anil ₹1,500 (total ₹6,300). Interest on drawings, as given (a debit to each partner): Mohan ₹250, Vijay ₹200, Anil ₹150 (total ₹600).

Step 3 — Corrected profit. Interest on capital reduces the divisible profit and interest on drawings adds to it, so the profit that should have been shared = ₹24,000 − ₹6,300 + ₹600 = ₹18,300, i.e. ₹6,100 to each partner equally.

Step 4 — Net adjustment (what each partner should now have, against the ₹8,000 already credited):

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No profit-sharing ratio is given, so the ₹24,000 profit was shared equally. Interest on capital is charged on the opening capitals (₹27,000; ₹21,000; ₹15,000), and interest on drawings is as stated. The net effect is a single entry: Anil's Capital A/c Dr. ₹550; To Mohan's Capital A/c ₹550.

Concept and Accounting Treatment

When omissions are discovered after the accounts are closed, we do not reopen the Profit and Loss Appropriation Account. We work out what each partner should have received had the interest items been recorded, compare it with what was actually credited, and pass one adjustment entry through the partners' capital accounts for the difference.

Two rules drive the working:

Interest on capital is calculated on the opening capital, not on the balance left at the year-end. The balances given (₹30,000; ₹25,000; ₹20,000) already include the year's profit and are net of drawings, so they must be worked back to the opening figures.
No profit-sharing ratio is stated, so by the Indian Partnership Act, 1932 the profit is shared equally.

Step-by-Step Solution

Step 1: Opening capitals

Profit ₹24,000 shared equally = ₹8,000 each. Opening Capital = Closing Capital − Share of profit + Drawings:

Partner	Closing (₹)	− Profit share (₹)	+ Drawings (₹)	Opening (₹)
Mohan	30,000	8,000	5,000	27,000
Vijay	25,000	8,000	4,000	21,000
Anil	20,000	8,000	3,000	15,000

Step 2: Interest on capital @ 10% on the opening capital

Mohan: 10% of ₹27,000 = ₹2,700
Vijay: 10% of ₹21,000 = ₹2,100
Anil: 10% of ₹15,000 = ₹1,500
Total = ₹6,300

Step 3: Interest on drawings (given)

Mohan ₹250, Vijay ₹200, Anil ₹150 (total ₹600)

Step 4: Corrected divisible profit

Interest on capital reduces the divisible profit; interest on drawings increases it:

Corrected profit = ₹24,000 − ₹6,300 + ₹600 = ₹18,300

Shared equally = ₹6,100 to each partner.

Step 5: Statement of adjustment

Partner	Interest on capital (Cr.)	Interest on drawings (Dr.)	Corrected profit share (Cr.)	Correct total (₹)	Already credited (₹)	Net effect (₹)
Mohan	2,700	250	6,100	8,550	8,000	550 (Cr.)
Vijay	2,100	200	6,100	8,000	8,000	Nil
Anil	1,500	150	6,100	7,450	8,000	550 (Dr.)

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Concept and Accounting Treatment

Step-by-Step Solution

Step 1: Opening capitals

Step 2: Interest on capital @ 10% on the opening capital

Step 3: Interest on drawings (given)

Step 4: Corrected divisible profit

Step 5: Statement of adjustment

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