Gupta and Sarin are partners in a firm sharing profits in the ratio of 3:2. Their fixed capitals are: Gupta 2,00,000, and Sarin 3,00,000. After the accounts for the year are prepared it is discovered that interest on capital @10% p.a. as provided in the partnership agreement, has not been credited in the capital accounts of partners before distribution of profits. Record adjustment entry to rectify the error.
Step 1: Calculate Interest on Capital Interest on Capital = Capital × Rate of Interest
- Gupta's Interest = 2,00,/100 = ₹20,000
- Sarin's Interest = 3,00,/100 = ₹30,000
- Total Interest on Capital = ₹50,000
Step 2: Calculate Amount Already Credited Wrongly as Profit Since interest on capital was not provided, the profit was distributed in the profit-sharing ratio of 3:2.
- Gupta's share = 3/,000 = ₹30,000
- Sarin's share = 2/,000 = ₹20,000
Step 3: Calculate Net Effect on Each Partner
| Particulars | Gupta (₹) | Sarin (₹) |
|---|---|---|
| Interest on Capital (Credit) | 20,000 | 30,000 |
| Profit already credited (Debit) | 30,000 | 20,000 |
| Net Effect | Debit 10,000 | Credit 10,000 |
Step 4: Adjustment Entry Gupta's Capital A/c Dr. 10,000 To Sarin's Capital A/c 10,000 (Being adjustment made for omission of interest on capital)
Explanation
This is a typical adjustment problem where interest on capital was omitted before profit distribution. The solution involves calculating what should have been credited (interest on capital) and what was wrongly credited (profit share), then finding the net effect. Since Gupta received more profit share (₹30,000) than his interest entitlement (₹20,000), he owes ₹10,000 to Sarin, who received less profit share (₹20,000) than his interest entitlement (₹30,000).
Solution Steps
Step 1: Calculate interest on capital for both partners at 10% p.a.
Step 2: Calculate the amount wrongly credited as profit to each partner in their profit-sharing ratio 3:2
Step 3: Find the net effect by comparing interest entitlement with profit share already received
Step 4: Pass the adjustment entry debiting the partner who gained and crediting the partner who lost