Accountancy Part AAccounting for Partnership

X and Y are partners sharing profits in the ratio 3:2. Capital introd…

X and Y are partners sharing profits in the ratio 3:2. Capital introduced by X and Y is ₹1,00,000 and ₹5,00,000 respectively. Interest on capital is allowed to partners @ 10%p.a. Profit of the firm for the year ending March 31st, 2025 is ₹30,000. Calculate Interest on Capital to be allowed to the partners.

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → 5,000; 25,000

Interest on capital is allowed only out of profits. When the profit is less than the interest due, the whole profit goes as interest and is shared in the ratio of the interest due to each partner, which here is the ratio of their capitals.

Interest due at 10%:

X = ₹1,00,000 × 10/100 = ₹10,000
Y = ₹5,00,000 × 10/100 = ₹50,000
Total interest due = ₹60,000, but profit is only ₹30,000

Profit shared in the ratio of interest (₹10,000 : ₹50,000 = 1 : 5):

X = ₹30,000 × 1/6 = ₹5,000
Y = ₹30,000 × 5/6 = ₹25,000

The profit sharing ratio of 3:2 is not used here: it applies only to profit left after the interest, and nothing is left.

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.”