Sukesh and Vanita were partners in a firm. Their partnership agreement provides that: (i) Profits would be shared by Sukesh and Vanita in the ratio of 3:2; (ii) 5% interest is to be allowed on capital; (iii) Vanita should be paid a monthly salary of ₹600. The following balances are extracted from the books of the firm, on March 31, 2017: | | Sukesh (₹) | Vanita (₹) | |---|---:|---:| | Capital Accounts | 40,000 | 40,000 | | Current Accounts | (Cr.) 7,200 | (Cr.) 2,800 | | Drawings | 10,850 | 8,150 | Net profit for the year, before charging interest on capital and after charging Sukesh's salary, was ₹9,500. Prepare the Profit and Loss Appropriation Account and the Partners' Current Accounts.

Sukesh and Vanita were partners in a firm. Their partnership agreement provides that: (i) Profits would be sha

Numerical Questions · Q13

Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:

Profits would be shared by Sukesh and Vanita in the ratio of 3:2;
5% interest is to be allowed on capital;
Vanita should be paid a monthly salary of ₹600. The following balances are extracted from the books of the firm, on March 31, 2017:

	Sukesh (₹)	Vanita (₹)
Capital Accounts	40,000	40,000
Current Accounts	(Cr.) 7,200	(Cr.) 2,800
Drawings	10,850	8,150

Net profit for the year, before charging interest on capital and after charging Sukesh's salary, was ₹9,500. Prepare the Profit and Loss Appropriation Account and the Partners' Current Accounts.

Yanam CbseNCERTSubjective· 5mImportance★★★★★

64% · 54/84 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

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)

Start your 14-day free trial to unlock the full solution →

The net profit of ₹9,500 is stated as before charging interest on capital but after charging the salary — so the salary has already been deducted in reaching ₹9,500, and must NOT be deducted again in the Appropriation Account. The deed grants the monthly salary to Vanita (not Sukesh — the stem's wording is a mis-print, since only Vanita's salary is mentioned in the deed), so it is credited to Vanita's Current Account.

Step 1 — Interest on capital @ 5%: Sukesh 5% of ₹40,000 = ₹2,000; Vanita 5% of ₹40,000 = ₹2,000. This is the only item left to appropriate from the given ₹9,500.

Step 2 — Divisible profit: ₹9,500 − ₹4,000 = ₹5,500, shared 3:2 — Sukesh 3/5 × 5,500 = ₹3,300; Vanita 2/5 × 5,500 = ₹2,200.

Profit and Loss Appropriation Account for the year ended March 31, 2017

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital: Sukesh 2,000, Vanita 2,000	4,000	By Net Profit (before interest, after Vanita's salary)	9,500
To Profit transferred to:
Sukesh's Current A/c (3/5)	3,300
Vanita's Current A/c (2/5)	2,200
Total	9,500	Total	9,500

Note

Vanita's salary (₹600 × 12 = ₹7,200) was already charged in arriving at the ₹9,500 profit figure — it does not appear again in the Appropriation Account. It is, however, still credited to Vanita's own Current Account below, since that is where the salary actually gets paid out.

Partners' Current Accounts …

Start your 14-day free trial to unlock the full solution →

Net profit ₹9,500 is after the salary and before interest on capital. After allowing 5% interest on capital (₹2,000 each), the balance ₹5,500 is shared 3 : 2 — Sukesh ₹3,300, Vanita ₹2,200. Closing current accounts: Sukesh ₹1,650 (Cr), Vanita ₹6,050 (Cr).

Reading the profit figure

The net profit of ₹9,500 is stated as "before charging interest on capital and after charging the salary." So the salary of ₹600 x 12 = ₹7,200 has already been deducted as a charge in reaching ₹9,500; the only remaining appropriation is interest on capital, after which the residue is shared 3 : 2.

Note

Question wording

The deed grants the monthly salary to Vanita (Sukesh has no salary in the deed); the stem's "Sukesh's salary" is a mis-print for Vanita's salary. As the salary was charged in the P&L Account, it is credited to Vanita's Current Account.

Working notes

Interest on capital @ 5%: Sukesh = 40,000 × 5% = 2,000; Vanita = 40,000 × 5% = 2,000.

Divisible profit = 9,500 - 4,000 = 5,500 → Sukesh 3/5=3,300, Vanita 2/5=2,200.

Salary = 600 × 12 = 7,200 (charged in P&L, credited to Vanita's current account).

Profit and Loss Appropriation Account

for the year ended 31 March 2017

Particulars	Rs	Particulars	Rs
To Interest on Capital:		By Profit & Loss A/c (net profit)	9,500
Sukesh 2,000
Vanita 2,000	4,000
To Profit transferred to Current A/cs:
Sukesh (3/5) 3,300

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ12 — Ramesh and Suresh were partners in a firm sharing profits in the ratio…→Next question · questions-for-practiceQ14 — Rahul, Rohit and Karan started partnership business on April 1, 2019 w…

Reading the profit figure

Working notes

Profit and Loss Appropriation Account

🎓Unlock everything free for 14 days

Unlock everything free for 14 days