Accountancy Part AAccounting for Partnership

Sultan and Badshah were partners sharing P & L in ratio 3 : 2. Their…

Sultan and Badshah were partners sharing P & L in ratio 3 : 2. Their capitals as on 1 April, 2022 were ₹2,50,000 and ₹2,00,000 respectively. Interest on capital was to be allowed @10% p.a. For the year ended March 31, 2023, the firm made profit of ₹36,000. Determine the amount of interest on capital to be credited to Sultan & Badshah respectively.

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → ₹20,000 & ₹16,000 respectively

Interest on capital due:

Sultan = 10% of ₹2,50,000 = ₹25,000

Badshah = 10% of ₹2,00,000 = ₹20,000

Total interest due = ₹45,000, but profit is only ₹36,000.

Interest is allowed only out of profits, so the whole profit is shared in the ratio of interest on capital, 25,000 : 20,000 = 5 : 4.

Sultan = ₹36,000 × 5/9 = ₹20,000

Badshah = ₹36,000 × 4/9 = ₹16,000

NCERT (2026-27 edition):
Illustration

Extract from the NCERT textbook

NCERT (2026-27 edition):
Interest on Capital – “… As clarified earlier, the interest on capital is allowed only when the firm has earned profit during the accounting year. Hence, no interest will be allowed during the year the firm has incurred net loss and if in a year, the profit of the firm is less than the amount due to the partners as interest on capital, the payment of interest will be restricted to the amount of profits. In that case, the profit will be effectively distributed in the ratio of interest on capital of each partner.”