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
Interest on capital was omitted, which means the profit distributed to partners was higher than it should have been. To rectify this, we need to:
Calculate interest on capital for both partners:
Interest on A's capital = 4,00,000 × 10% = Rs 40,000
Interest on B's capital = 5,00,000 × 10% = Rs 50,000
Total interest omitted = Rs 90,000
Since the profit-sharing ratio is not given, it is assumed to be equal (1:1).
When interest on capital is omitted, the profit distributed to each partner includes their share of this Rs 90,000.
Excess profit distributed to each partner = 90,000 ÷ 2 = Rs 45,000
Adjustment for A:
Amount A should receive (Interest on Capital) = Rs 40,000
Amount A already received (Share in excess profit) = Rs 45,000
Net adjustment = 40,000 - 45,000 = -Rs 5,000
Since A received Rs 5,000 more than entitled, A's Current Account will be debited by Rs 5,000.
Verification for B:
Amount B should receive = Rs 50,000
Amount B already received = Rs 45,000
Net adjustment = 50,000 - 45,000 = Rs 5,000 (Credit)
The adjustments balance out: A is debited Rs 5,000 while B is credited Rs 5,000.
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