Read the following information to answer.
Arun and Ram are partners in a restaurant business sharing profits and losses in capital ratio. Their fixed capital from the beginning of the firm was ₹2,00,000 and ₹1,50,000 respectively.
The profit for the year ended 31 March 2022 before the appropriation of Salary and Interest on Capital was ₹2,20,000. Ram is allowed a salary of ₹2,000 per quarter, and both partners are allowed interest on capital @ 10% p.a.
Due to the further expansion of the business, they decided to admit Sanjeev as a new partner for 1/5 share in profits. It was agreed that Sanjeev will bring ₹1,00,000 as capital and ₹50,000 as his share of Goodwill. It was decided that he will give ₹1,00,000 as loan to the firm for 3 years.
Interest on capital will be shown on the Dr. side of Profit and Loss Appropriation A/c and ............side of Partner's................ A/c.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Credit, Current A/c
Interest on capital is an appropriation of profit: the Profit and Loss Appropriation Account is debited and the partners are credited, because the interest is a gain for them. Arun and Ram keep fixed capitals, so their capital accounts stay unchanged, and every item such as interest on capital, salary, drawings and share of profit goes to their current accounts.
Option (1) Credit, Capital A/c — Incorrect. The side is right, but under the fixed capital method the capital account is not touched by interest on capital; it would be credited only under the fluctuating capital method.
Option (2) Debit, Current A/c — Incorrect. Debiting the current account would treat the interest as a charge on the partner; it is an amount due to him, so it is credited.
Option (4) Debit, Capital A/c — Incorrect. Both the side and the account are wrong: interest on capital is credited, and with fixed capitals it goes to the current account.
NCERT (2026-27 edition): NCERT (2026-27 edition):
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