Do It Yourself · Q1
Q.Gupta and Sarin are partners in a firm sharing profits in the ratio of 3:2. Their fixed capitals are: Gupta ₹2,00,000, and Sarin ₹3,00,000. After the accounts for the year are prepared it is discovered that interest on capital @ 10% p.a. as provided in the partnership agreement, has not been credited in the capital accounts of partners before distribution of profits. Record adjustment entry to rectify the error.
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The ₹50,000 interest on capital that should have gone 40%/60% to Gupta/Sarin (₹20,000/₹30,000) instead went out via the 3:2 profit-sharing ratio (₹30,000/₹20,000) — the reverse proportion. Correcting this needs Gupta's Capital A/c debited ₹10,000 and Sarin's credited ₹10,000.
Working Notes
Interest on capital due (10% p.a.): Gupta 10% of ₹2,00,000 = ₹20,000; Sarin 10% of ₹3,00,000 = ₹30,000. Total = ₹50,000.
Amount actually credited (this ₹50,000 flowed into profit and was split 3:2): Gupta 3/5 × ₹50,000 = ₹30,000; Sarin 2/5 × ₹50,000 = ₹20,000.
Statement Showing Net Effect
| Details | Gupta (₹) | Sarin (₹) |
|---|---|---|
| (i) Interest on capital that should have been credited | 20,000 (Cr.) | 30,000 (Cr.) |
| (ii) Amount actually credited via the (wrong) 3:2 profit split | 30,000 (Cr.) | 20,000 (Cr.) |
| (iii) Net effect (i) − (ii) | Dr. 10,000 (Excess) | Cr. 10,000 (Short) |
Solution — Journal Entry
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Gupta's Capital A/c Dr. | 10,000 | ||
| To Sarin's Capital A/c | 10,000 | ||
| (Adjustment for omission of interest on capital) |
✓Final answer
Gupta's Capital A/c is debited ₹10,000 and Sarin's Capital A/c is credited ₹10,000.
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