Question

Parul and Rajul were partners in a firm, sharing profits and losses in the ratio of 5 : 3. The balance in their fixed capital accounts on 1st April, 2023 were: Parul Rs 6,00,000 and Rajul Rs 8,00,000. The partnership deed provided for allowing interest on capital at 12\% per annum. The net profit of the firm for the year ended 31st March, 2024 was Rs 1,26,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024. Show your working clearly.

Hint:

If the net profit is less than the total amount of appropriations (like Interest on Capital, Salary), the available profit is distributed among the partners in the ratio of the appropriations due to them, unless the partnership deed specifies otherwise (e.g., treat IoC as a charge). When capitals are fixed, appropriations are routed through Current Accounts.

Answer 1

Operational Notes:
1. Interest on Capital Calculation:
Interest is applied to Fixed Capitals.
Parul's Interest on Capital = Rs 6,00,000 \( \times \) 12% = Rs 72,000
Rajul's Interest on Capital = Rs 8,00,000 \( \times \) 12% = Rs 96,000
Total Interest on Capital = Rs 72,000 + Rs 96,000 = Rs 1,68,000
2. Profit Sufficiency Assessment:
Net Profit for the fiscal year = Rs 1,26,000
Total Interest on Capital requirement = Rs 1,68,000
As Net Profit is less than Total Interest on Capital, profits are insufficient to cover the full interest.
3. Profit Allocation as Interest on Capital:
When profits are insufficient for appropriations like Interest on Capital (and the partnership agreement does not specify treatment for loss or inadequacy), the available profit is allocated among partners in the proportion of their intended appropriations (in this scenario, the ratio of their Interest on Capital).
Ratio of Interest on Capital = Parul : Rajul = 72,000 : 96,000
Simplified ratio (dividing by 24,000): 3 : 4.
The available Profit (Rs 1,26,000) will be distributed as Interest on Capital in the 3:4 ratio.
Parul's Profit Share (as Interest on Capital) = \( \frac{3}{7} \times 1,26,000 = Rs 54,000 \)
Rajul's Profit Share (as Interest on Capital) = \( \frac{4}{7} \times 1,26,000 = Rs 72,000 \)
Total distributed = Rs 54,000 + Rs 72,000 = Rs 1,26,000.
(Note: Since capitals are fixed, Interest on Capital is credited to Partners' Current Accounts).
Profit and Loss Appropriation Account
for the year ended 31st March, 2024
\begin{longtable}{|l|r|l|r|}\hlineDebit & Amount (Rs) & Credit & Amount (Rs)
\hline\endfirsthead\hlineDebit & Amount (Rs) & Credit & Amount (Rs)
\hline\endhead\hline\endfoot\hline\endlastfootTo Interest on Capital:* & & By Profit and Loss A/c & 1,26,000
\quad Parul's Current A/c & 54,000 & & (Net Profit)
\quad Rajul's Current A/c & 72,000 & 1,26,000 &
\hlineTotal & 1,26,000 & Total & 1,26,000
\hline\end{longtable}*Note: Available profit is distributed in the ratio of Interest on Capital (3:4) due to insufficient profits.