Page 16 - ISCDEBK-12

1.6 Double Entry Book Keeping (Section A)—ISC XII

Solution:
(i) When Partnership Deed is silent in treating interest as a charge or appropriation:
Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT Cr.
Particulars ` Particulars `
To Interest on Capital A/cs: By Profit and Loss A/c 30,000
A 20,000 (Profit for the year)
B 10,000 30,000
30,000 30,000

Working Note:
Interest on A’s Capital and B’s Capital is ` 24,000 and ` 12,000 respectively. Thus, total interest is ` 36,000. Since,
the profit before interest is only ` 30,000, interest on capital will be shared in the ratio of interest allowable, i.e.,
` 24,000 : ` 12,000 or 2 : 1. Interest on Capital allowed to respective partner will be:
` 30 000 ¥ ` 24 000 ` 30 000 ¥ `12 000
,
,
,
,
A = = ` 20,000; B = = ` 10,000.
` 36 000, ` 36 000,
(ii) When Interest is a charge as per Partnership Deed:
Dr. PROFIT AND LOSS ACCOUNT Cr.
Particulars ` Particulars `
To Interest on Capital A/cs: By Profit before Interest 30,000
A 24,000 By Loss transferred to Capital A/cs:
B 12,000 36,000 A 2,400
B 3,600 6,000
36,000 36,000

Note: Profit and Loss Appropriation Account shall not be prepared because interest on capital is a
charge against profit. Since, the profit is less than interest on capital, deficit (after interest) shall be treated as loss.
Illustration 5.
A, B and C are in partnership and during the year ended 31st March, 2018 earned profit
of ` 83,000. A and B are entitled to 5% p.a. interest on their capitals of ` 60,000 and
` 1,00,000 respectively while C, who has no capital in the firm, is entitled to a salary of ` 12,000
p.a. C is also entitled to a commission of 5% on the balance profits, i.e., after charging interest,
salary and commission. It is further agreed that out of the remaining profit 20% shall be donated
to Prime Minister’s National Relief Fund and balance profit will be shared equally by the partners.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2018.
Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2018 Cr.
Particulars ` Particulars `
To C’s Salary A/c 12,000 By Profit and Loss A/c (Profit) 83,000
To Interest on Capital A/cs:
A 3,000
B 5,000 8,000
To C ’s Commission A/c 3,000
[5/105 (` 83,000 – ` 12,000 – ` 8,000)]
To Donation A/c [20% of ` (83,000 – 23,000)] 12,000
To Profit transferred to Capital A/cs:
A 16,000
B 16,000
C 16,000 48,000
83,000 83,000