Page 53 - DEBKVOL-1

Chapter 2 Accounting for Partnership Firms—Fundamentals 2.25
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Illustration 19.

A and B are partners sharing profits and losses in the ratio of 3 : 2 with capitals of ` 4,00,000
and ` 3,00,000 respectively. Interest on capital is agreed @ 5% p.a. B is to be allowed an
annual salary of ` 30,000 which has not been withdrawn. Profit for the year ending
31st March, 2018 prior to calculation of interest on capital but after charging B’s salary is
` 1,20,000. A provision of 5% of the profit is to be made in respect of commission to the manager.
Prepare an account showing the appropriation of profit.
Solution:
Dr. PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2018 Cr.
Particulars ` Particulars `

To Manager’s Commission A/c 7,500 By Profit (` 1,20,000 + ` 30,000) 1,50,000
(@ 5% on ` 1,50,000) (Note)
To Net Profit transferred to Profit and Loss
Appropriation A/c 1,42,500
1,50,000 1,50,000

Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2018 Cr.
Particulars ` Particulars `

To B’s Salary A/c 30,000 By Profit and Loss A/c (Net Profit) 1,42,500
To Interest on Capital A/cs:
A 20,000
B 15,000 35,000
To Profit transferred to:
A’s Capital A/c 46,500
B’s Capital A/c 31,000 77,500
1,42,500 1,42,500

Note: Manager is an employee of the firm. Commission payable to him/her is in the nature of salary. Therefore,
it is debited to Profit and Loss Account to determine net profit.

Unsolved Questions

1. A and B are partners in a firm sharing profits equally. They had advanced ` 30,000 as loan in their profit-
sharing ratio on 1st October, 2017. The Partnership Deed is silent on the question of interest on the loan
from partners. Compute the interest payable by the firm to the partners, assuming the firm closes its books
on 31st March each year.
[Ans.: Interest on partner’s loan = ` 15,000 × 6/100 × 6/12 = ` 450.]
2. On 1st April, 2017, A and B entered into partnership contributing ` 60,000 and ` 45,000 respectively. They
agreed to share profits and losses in the ratio of 3 : 2. B is allowed salary of ` 12,000 per year. Interest
on capital is to be allowed @ 10% p.a. During the year, A withdrew ` 9,000 and B withdrew ` 18,000 as
drawings. Interest on drawings paid by A and B were ` 150 and ` 210 respectively. Profit for the year ended
31st March, 2018 before the above adjustments was ` 35,000. Show distribution of profits by preparing
Profit and Loss Appropriation Account of the firm. Prepare Partners’ Capital Accounts also.
[Ans.: Profit: A—` 7,716; B—` 5,144 and Balances of Capital A/cs: A—` 64,566; B—` 48,434.]