Question

Priya and Shreya are partners in a firm sharing profits and losses in the ratio of 3:2. Interest on capital is allowed at 10% p.a. Balance Sheet at the end of 31.12. 2014 of the firm are as follows:

           Balance Sheet as on 31 December, 2014 

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Capital accounts:
Priya	40,000	Sundry Assets	70,000
Shreya	30,000	Drawings of Priya	10,000
Profit & Loss Appropriation Account	10,000
	80,000		80,000

During the year, Priya withdrew Rs.10,000 and Shreya withdrew Rs.8,000. Profits for the year 2014 before charging interest on capital amounted to Rs. 17,000. You are required to calculate interest on capital due to partners, prepare a Profit & Loss Appropriation A/c, Capital accounts of Partners and Revised Balance Sheet of the firm, presuming that no adjustments for interest on capital have so far been made.

Answer 1

For calculating interest on capital, it isnecessary to calculate the partners’ capital in the beginning of the year. In the Balance Sheet, capitals of the partners at the end of the accounting year have been given. Drawing made by Priya is appearing in the Balance sheet, this means it is not deducted from her capital. A part of the profit earned in the year i.e. Rs. 7,000 (17,000- 10,000) has already been credited to partners in the ratio of 3:2 So for calculating partners’ capital at the beginning of the year, it is necessary to make adjustments for above items as given below:

Revised Balance Sheet of the firm as on 31.12.2014