A, B & C are partners sharing profits and losses in the ratio of 5: 3: 2. The partnership deed provides for charging interest on drawings @ 10% p.a. The drawings of A, B & C amounted to ₹40,000, ₹30000 and ₹20,000 respectively. Interest on drawings is charged for the full year. After the final accounts have been prepared, it was discovered that interest on drawings has not been taken into consideration. Pass the necessary adjustment journal entry?
Answer & explanation
Correct answer: option 4
The correct answer is option 4-
B's Capital A/c Dr. ₹300
C's Capital A/c Dr. ₹200
To A's Capital A/c ₹500
(I.O.D adjusted)
Interest on drawings-
A = 40,000 x 10/100
= 4,000
B = 30,000 x 10/100
= 3,000
C = 20,000 x 10/100
= 2,000
Charging interest from partner is a profit for the firm.
Profit = 4,000 + 3,000 + 2,000
= 9,000
This profit is divided between partners in their profit sharing ratio i.e. 5:3:2
Profit share of partners-
A = 9,000 X 5/10
= 4,500
B = 9,000 X 3/10
= 2,700
C = 9,000 X 2/10
= 1,800
Amount which should have been debited by way of interest on drawings is A- ₹4000 B- ₹3000 C- ₹2000
Amount which should have been credited by way of share of profit is A- ₹4500 B- ₹2700 C- ₹1800.
So, A will get credit of ₹500 B will get debit of ₹300 C will get debit of ₹200.
So, adjustment entry is:
B's Capital A/c Dr. ₹300
C's Capital A/c Dr. ₹200
To A's Capital A/c ₹500
* Capital account is debited or credited as in case of no information, partners account are maintained by fluctuating account.