A and B are partners in a firm with their fixed capital Rs 4,00,000 and 5,00,000 respectively. After preparation of accounts, it was found that interest on capital @ 10% p.a as provided by the partnership deed is omitted. In order to rectify the mistake, A's Current account will be _____?
A and B are partners in a firm with their fixed capital Rs 4,00,000 and 5,00,000 respectively. After preparation of accounts, it was found that interest on capital @ 10% p.a as provided by the partnership deed is omitted. In order to rectify the mistake, A's Current account will be _____?
Solution
Given:
- A's Fixed Capital = Rs 4,00,000
- B's Fixed Capital = Rs 5,00,000
- Interest on Capital @ 10% p.a. was omitted
- Profit sharing ratio = 1:1 (assumed as not mentioned)
Calculating Interest on Capital:
A's Interest = 4,00,000 × 10/100 = Rs 40,000
B's Interest = 5,00,000 × 10/100 = Rs 50,000
Total Interest = Rs 90,000
Understanding the error:
When interest on capital was omitted, the profits were not reduced by Rs 90,000. This means both partners received Rs 45,000 extra each (90,000 ÷ 2) as their share of the inflated profit.
Rectification effect on A:
Interest A should receive = Rs 40,000 (Credit to A's account)
Extra profit A already received = Rs 45,000 (needs to be reversed - Debit to A's account)
Net effect on A = 40,000 - 45,000 = -Rs 5,000
Since the net effect is negative, A has received Rs 5,000 more than entitled. Therefore, A's Current Account will be Debited by Rs 5,000 to rectify the mistake.
The journal entry for rectification would show:
- Interest on Capital A/c Dr. 90,000
- To A's Current A/c 40,000
- To B's Current A/c 50,000
- A's Current A/c Dr. 45,000
- B's Current A/c Dr. 45,000
- To Profit & Loss Adjustment A/c 90,000
Net effect: A's Current A/c Debited by Rs 5,000
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