# Solve this:Illustration 24 (Interest on Capital when Profit is Inadequate). A and B contribute Rs. 4,00,000 and Rs. 2,00,000 respectively as capital on which they agree to pay interest @ 6% p.a. Their respective share of profit is 2: 3 and the profit (before interest) for the year is Rs. 30,000. Show the relevant account to allocate interest on capitals:         (i) if the Partnership Deed is silent about the treatment of interest on capital, and          (ii) if interest is a charge as per the Partnership Deed.

Dear Student

(i)
Interest on Capital :
A - 4,00,000 x 6% = 24,000/-
B - 2,00,000 x 6% = 12,000/-

Since profit is insufficient Interest would be divided as follows:

 Profit and Loss Appropriation A/c Date Particulars Amount Date Particulars Amount (Rs) (Rs) Net profit 30,000 Interest on Capital A - 30,000 x 24,000 / 36,000 20,000 B - 30,000 x 12,000 / 36,000 10,000 30,000 30,000 30,000

(ii)
In this case, when interest is treated as a charge against profit, it shall be debited to profit and loss account or Profit and loss adjustment A/c and then the leftover profit or loss shall be transferred to Appropriation account.

 Profit and Loss Adjustment A/c Date Particulars Amount Date Particulars Amount (Rs) (Rs) Profit and Loss A/c 30,000 Interest on Capital A - 30,000 x 24,000 / 36,000 24,000 B - 30,000 x 12,000 / 36,000 12,000 36,000 Net Loss - (To be transferred to Profit and loss Appropriation A/c) 6,000 36,000 36,000

Regards

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