Question

The capital accounts of Moli and Golu showed balances of Rs 40,000 and Rs 20,000 as on April 01, 2019. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu advanced a loan of Rs 10,000 to the firm on August 01, 2019. During the year, Moli withdrew Rs 1,000 per month at the beginning of every month whereas Golu withdrew Rs 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was Rs 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.

Answer 1

Dr.				Profit and Loss Adjustment Account				Cr.
Particulars				Amount Rs	Particulars			Amount Rs
Interest on Capital:					Profit and Loss Account (20,950 – Interest on Golu’s Loan)			20,550
Moli			4,000	6,000	Interest on Drawings:
Golu			2,000		Moli		780	1,440
					Golu		660
Profit transferred to:
Moli’s Capital {15,990 × (3/5)}			9,594	15,990
Golu’s Capital {15,990 × (2/5)}			6,396
				21,990				21,990

 

Dr.	Partners’ Capital Account				Cr.
Particulars	Moli	Golu	Particulars	Moli	Golu
Drawings	12,000	12,000	Balance b/d	40,000	20,000
Interest on Drawing	780	660	Interest on Capital	4,000	2,000
Balance c/d	40,814	15,736	Profit and Loss Adjustment	9,594	6,396
	53,594	28,396		53,594	28,396

Working Note:

1) Interest on Golu's Loan:

⇒ `10,000 xx 6/100 xx 8/12 = 400`

2) Calculation of Interest on Capital:

⇒ `"Total Capital"  xx "Rate" xx "Average Period"/12`

Moli ⇒ `40,000 xx 10/100 xx 12/12` = 4,000

Golu ⇒ `20,000 xx 10/100 xx 12/12` = 2,000

3) Calculation of Interest on Drawings:
⇒ `"Total Drawings"  xx "Rate" xx "Average Period"/12`
Moli ⇒ `12,000 xx (12)/(100) xx (6 1/2)/(12)` = Rs. 780

Golu ⇒ `12,000 xx (12)/(100) xx (5 1/2)/(12)` = Rs. 660

Note:  

1. If drawings is done at the beginning of every month, then interest on drawings is calculated of `6 1/2` months.
2. If drawings is done at the ending of every month, then interest on drawings is calculated of `5 1/2` months.
3. If rate of interest on loan is not given, then it will be charged always 6%.
4. Interest on Partner's Loan being a charge on profits, it to be shown as a deduction from Net Profit in Profit and Loss Appropriation Account or shown on the debit side of Profit and Loss Account.