Anju, Manju and Mamta are partners whose fixed capitals were Rs. 10,000, Rs. 8,000 and Rs. 6,000, respectively

Numerical Questions · Q43

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.

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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Under this method, the capital account remains constant (except when additional capital is introduced or capital is withdrawn permanently).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 @ 5% p.a. on the fixed capitals was omitted for three years, so the amount that should have been set aside as interest was instead left in the profit and shared in each year's profit-sharing ratio. We correct this by a single adjustment entry for the net effect over the three years — we cannot reopen the closed profits of past years.

Interest on capital each year: Anju 5% of ₹10,000 = ₹500; Manju 5% of ₹8,000 = ₹400; Mamta 5% of ₹6,000 = ₹300. Total ₹1,200 a year. For each year, net effect = interest a partner should have received − that partner's share of the ₹1,200 (which was wrongly taken as extra profit) in that year's ratio:

Year (ratio)	Anju (₹)	Manju (₹)	Mamta (₹)
2016 (4 : 3 : 5)	500 − 400 = +100	400 − 300 = +100	300 − 500 = −200
2017 (3 : 2 : 1)	500 − 600 = −100	400 − 400 = 0	300 − 200 = +100
2018 (1 : 1 : 1)	500 − 400 = +100	400 − 400 = 0	300 − 400 = −100
Net	+100 (Cr.)	+100 (Cr.)	−200 (Dr.)

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Interest on capital @ 5% (₹500, ₹400, ₹300 a year) was omitted for three years. Working out the net effect year by year on each year's own profit-sharing ratio gives Anju +₹100, Manju +₹100, Mamta −₹200. The single adjustment entry is Mamta's Current A/c Dr. ₹200; To Anju's Current A/c ₹100; To Manju's Current A/c ₹100.

Why a single adjustment entry

Interest on capital is an appropriation of profit. When it is left out, the amount that should first have been set aside as interest stays inside the divisible profit and is shared among the partners in that year's profit-sharing ratio. The past years' Profit and Loss Appropriation Accounts are already closed, so we do not reopen them — instead we pass one entry at the start of the fourth year for the net effect on each partner, routed through the partners' Current Accounts (the capitals are fixed).

For each year and each partner:

Net effect = Interest on capital that was due − Partner's share of the total interest (₹1,200) in that year's ratio

Working notes

1. Interest on capital each year (5% on the fixed capitals):

Anju: 5% of ₹10,000 = ₹500
Manju: 5% of ₹8,000 = ₹400
Mamta: 5% of ₹6,000 = ₹300
Total each year = ₹1,200

2. Year-wise net effect. The ₹1,200 was shared as extra profit in the ratio shown for each year:

Year 2016 — ratio 4 : 3 : 5 (total 12). Share of ₹1,200: Anju ₹400, Manju ₹300, Mamta ₹500.

Partner	Interest due (₹)	Share of ₹1,200 (₹)	Net effect (₹)
Anju	500	400	+100 (Cr.)
Manju	400	300	+100 (Cr.)
Mamta	300	500	−200 (Dr.)

Year 2017 — ratio 3 : 2 : 1 (total 6). Share of ₹1,200: Anju ₹600, Manju ₹400, Mamta ₹200.

Partner	Interest due (₹)	Share of ₹1,200 (₹)	Net effect (₹)
Anju	500	600	−100 (Dr.)
Manju	400	400	0
Mamta	300	200	+100 (Cr.)

Year 2018 — ratio 1 : 1 : 1 (total 3). Share of ₹1,200: ₹400 each.

Partner	Interest due (₹)	Share of ₹1,200 (₹)	Net effect (₹)
Anju	500	400	+100 (Cr.)
Manju	400	400	0
Mamta	300	400	−100 (Dr.)

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Why a single adjustment entry

Working notes

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