A and B are partners in a firm with their fixed capital ₹4,00,000 and ₹5,00,000 respectively. After preparation of accounts, it was found that interest on capital @ 10% p.a as provided by the partnership deed is omitted. In order to rectify the mistake, A's Current account will be........
Answer & explanation
Correct answer: option 2
The correct answer is option 2- Debited by ₹5,000.
A and B are partners in a firm with their fixed capital ₹4,00,000 and ₹5,00,000 respectively. Interest on capital @ 10% p.a.
Interest on A's capital = 4,00,000 x 10/100
= 40,000
Interest on B's capital = 5,00,000 x 10/100
= 50,000
Total interest = 40,000 + 50,000
= 90,000
Total interest will be credited to partners = ₹90,000.
It will result a loss for the firm and this loss is shared between partners equally i.e. (1:1)
So, A's loss = 90,000/2
= 45,000
B's loss = 90,000/2
= ₹45,000
This loss is debited to partners account.
A will be credited with interest on capital of ₹40,000 and debited with loss of ₹45,000 so net debit to A account is ₹5,000.
B will be credited with interest on capital of ₹50,000 and debited with loss of ₹45,000 so net credit to B account is ₹5,000.
Thus, adjustment entry is as follows-
Adjustment entry will be:
A's Current A/c Dr. ₹5,000
To B's Current A/c ₹5,000
(Being interest on capital is rectified)