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 interest on capital @ 10% p.a.
Due to the further expansion of the business, they decided to enter 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.
As fixed capital method is followed, current account is credited. Account is credited as interest on capital will increase the balance of the current account.