T.S.

Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Illustration 1 (Provisions of the Indian Partnership Act, 1932).

Atal and Lal are partners in a firm. They do not have Partnership Deed. What shall be
the position in the following cases?

(i) Atal devotes more time than Lal in the business. Atal demands a salary of ` 6,000 per
month for it.
(ii) Lal has invested capital of ` 50,000 whereas Atal has invested ` 5,000 as capital. Atal,
however, has advanced ` 10,000 as loan to the firm. What interest, if any, will be
allowed to Atal and Lal?

Solution:
In the absence of Partnership Deed, provisions of the Indian Partnership Act, 1932 shall
apply to settle the disputes:
(i) Salary is not payable to any partner. Therefore, Atal will not get salary.
(ii) Interest on capital is not payable to any partner in the absence of Partnership Deed.
Therefore, Atal and Lal will not get interest on their capitals. Interest on loan is payable
@ 6% p.a. Thus, Atal will get interest on loan @ 6% p.a.

Illustration 2 (Preparation of Profit & Loss Appropriation Account).

Ram and Mohan are partners in a firm. They admitted Rakhi as a partner without capital
for 1/3rd share in the profit of the firm. She is blind by birth but having good management
qualities. The new partnership agreement provides for the following:
(i) 10% of the trading profit will be donated to Prime Minister’s Relief Fund.
(ii) 5% of the trading profit will be donated to the National Blind Relief Fund.
(iii) Products will be sold at a discount of 15% on Maximum Retail Price to the people
living below poverty line.
(iv) New retail shops will be opened in the Naxal affected areas of the country.
(v) New jobs of sales persons will be reserved for the girls belonging to Scheduled Castes
and Scheduled Tribes.
Trading profit of the firm for the year ended 31st March, 2012 was ` 10,00,000.
Prepare ‘Profit & Loss Appropriation Account’ of Ram, Mohan and Rakhi for the year
ended 31st March, 2012. (Delhi 2013 C, Modified)
Solution: PROFIT & LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2012 Cr.
Particulars
` Particulars `
To Prime Minister’s Relief Fund 1,00,000 By Profit & Loss A/c 10,00,000
To National Blind Relief Fund 50,000 (Trading Profit)
To Net Profit transferred to:
Ram’s Capital A/c 2,83,333
Mohan’s Capital A/c 2,83,333
Rakhi’s Capital A/c 2,83,334 8,50,000
10,00,000   10,00,000

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Illustration 3 (Omission of Interest on Capital and Drawings when Closing Balances of Capital
are given).
On 31st March, 2019, Capital Accounts of E, M and A after making adjustments for profits,
drawings, etc., were as E—` 8,00,000; M—` 6,00,000 and A—` 4,00,000. Subsequently,
it was noticed that interest on capital and interest on drawings had been omitted.
Partners were entitled to interest on capital @ 5% p.a. Drawings during the year were:
E—` 2,00,000; M—` 1,50,000 and A—` 90,000. Interest on drawings chargeable to the partners
were: E—` 5,000; M—` 3,600 and A—` 2,000. Net profit during the year was ` 12,00,000.
Profit-sharing ratio of the partners was 3 : 2 : 1.
Pass necessary adjustment entry for rectifying the above omission. Show your workings.

Solution: RECTIFYING ENTRY

Date Particulars L.F. Dr. (`) Cr. (`)
2019 E’s Capital A/c ...Dr. 5,700
March 31 To M’s Capital A/c 100
  To A’s Capital A/c 5,600
(Adjustment entry recorded due to omission of
Interest on Capital and Drawings)

Working Notes:
1. Interest is allowed on opening capital. Therefore, capitals of the partners in the beginning of the year, i.e.,
1st April, 2018 are calculated as follows:

CALCULATION OF CAPITALS IN THE BEGINNING

Particulars E M A
` ` `
Capital at the end of the year 8,00,000 6,00,000 4,00,000
Add: Drawings made during the year 2,00,000 1,50,000 90,000
10,00,000 7,50,000 4,90,000
Less: Profit already credited 6,00,000 4,00,000 2,00,000
Capital in the beginning 4,00,000 3,50,000 2,90,000

2. PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2019 Cr.
Particulars
` Particulars `

To Interest on Capital A/cs: By Profit & Loss A/c (Net Profit) 12,00,000
E (` 4,00,000 × 5/100) 20,000 By Interest on Drawings A/cs:
M (` 3,50,000 × 5/100) 17,500 E 5,000
A (` 2,90,000 × 5/100) 14,500 52,000 M 3,600
To Profit transferred to: A 2,000 10,600
E’s Capital A/c (3/6) 5,79,300
M’s Capital A/c (2/6) 3,86,200
A’s Capital A/c (1/6) 1,93,100 11,58,600
12,10,600 12,10,600

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

3. STATEMENT SHOWING THE ADJUSTMENT TO BE MADE

Particulars E’s Capital A/c M’s Capital A/c A’s Capital A/c Firm
Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)
Interest on Capital ... 20,000 ... 17,500 ... 14,500 52,000 ...
Interest on Drawings 5,000 ... 3,600 ... 2,000 ... ... 10,600
Profit already distributed 6,00,000 ... 4,00,000 ... 2,00,000 ... ... 12,00,000
Profit to be credited ... 5,79,300 ... 3,86,200 ... 1,93,100 11,58,600 ...
6,05,000 5,99,300 4,03,600 4,03,700 2,02,000 2,07,600 12,10,600 12,10,600
Balance to be adjusted 5,700 100 5,600 ...
(Net Effect) Dr. Cr. Cr.

Illustration 4 (Calculation of Interest on Capital when Closing Balances of Capital are given).
A, B, C and D are partners sharing profits and losses in the ratio of 4 : 3 : 3 : 2 and their
respective capitals on 31st March, 2019 were ` 30,000; ` 45,000; ` 60,000 and ` 45,000. After
closing and finalising the accounts, it was noticed that interest on capital @ 6% p.a. was not
allowed. Instead of altering the signed accounts it was decided to pass an adjustment entry
on 1st April, 2019 crediting or debiting the respective Partners’ C apital/Current A ccounts.
Solution: ADJUSTMENT ENTRY
Date Particulars L.F. Dr. (`) Cr. (`)

2019
April  1 A’s Current A/c ...Dr. 1,800
To C’s Current A/c 900
To D’s Current A/c 900
(Interest on capital omitted in the accounts, now adjusted)

Working Note:
Interest on capital is calculated on the opening balance. In the question, closing balances of capital are given.
Since, the amount of profit credited to capitals has not been given; it is not possible to ascertain the opening
capitals. Thus, it is assumed that capitals of the partners are fixed (i.e., same on opening and closing dates).
Interest on capital was ` 10,800 (A—` 1,800; B—` 2,700; C—` 3,600 and D—` 2,700). Due to the omission
of this interest, an excess amount of ` 10,800 as profit has been credited (distributed) to the partners in
the profit-sharing ratio which should have been distributed in the capital ratio (i.e., as interest on capital).
Hence, ` 10,800 should be written back by debiting the partners in the profit-sharing ratio and thereafter
distributed to them in the capital ratio.

STATEMENT SHOWING THE ADJUSTMENT TO BE MADE

Partners Profits to be Written Back Interest to be Allowed Adjustment (`)
Debit (`) Credit (`)
A 3,600 (4/12 of 10,800) 30,000 × 6/100 = 1,800 1,800 (Dr.)
B 2,700 (3/12 of 10,800) 45,000 × 6/100 = 2,700 Nil
C 2,700 (3/12 of 10,800) 60,000 × 6/100 = 3,600 900 (Cr.)
D 1,800 (2/12 of 10,800) 45,000 × 6/100 = 2,700 900 (Cr.)
10,800  10,800 Nil

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Illustration 5 (Minimum earning Guaranteed by a Partner to the Firm and Minimum Profit
Guaranteed by the Firm to a Partner).
Three Chartered Accountants X, Y and Z form a partnership, sharing profits and losses
in the ratio of 3 : 2 : 1 subject to the following conditions:
(i) Z ’s share of profits is guaranteed to be not less than ` 30,000 p.a.
(ii) Y gives a guarantee to the effect that the gross fee earned by him for the firm shall
not be less than the average gross fee earned by him during the preceding five years
when he was carrying on the profession alone (the average of which works out at
` 50,000).
Profit for the first year (year ended 31st March, 2019) of the partnership is ` 1,50,000. The
gross fee earned by Y for the firm is ` 32,000.
Prepare Profit & Loss Appropriation Account after giving effect to the above.

Solution: PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2019 Cr.
Particulars
` Particulars `

To Profit transferred to: By Profit & Loss A/c 1,50,000

X’s Capital A/c 84,000 —Net Profit
Less: Deficiency in Z’s Share 1,200 82,800 By Y’s Capital A/c 18,000
(WN 2) (WN 1)
Y’s Capital A/c 56,000
Less: Deficiency in Z’s Share 800 55,200
(WN 2)
Z’s Capital A/c 28,000
Add: Recovered From X 1,200
Recovered From Y 800 30,000
1,68,000 1,68,000

Working Notes: `
1. Profit for the first year of partnership 1,50,000
Add: Difference between the guaranteed fee to be earned by Y
and actual fee earned (` 50,000 – ` 32,000) 18,000
Projected Gross Fee of the firm 1,68,000
X’s Share = ` 1,68,000 × 3/6 = ` 84,000;
Y’s Share = ` 1,68,000 × 2/6 = ` 56,000; and
Z’s Share = ` 1,68,000 × 1/6 = ` 28,000.
2. Z was guaranteed a minimum sum of ` 30,000. Hence, the deficiency of ` 2,000 will be borne by X and
Y in the ratio of 3 : 2 as follows:
X = ` 2,000 × 3/5 = ` 1,200; Y = ` 2,000 × 2/5 = ` 800
Thus, X’s Share of Profit = ` 84,000 – ` 1,200 = ` 82,800;
Y’s Share of Profit = ` 56,000 – ` 800 = ` 55,200;
Z’s Share of Profit = ` 28,000 + ` 1,200 (X ) + ` 800 (Y) = ` 30,000.

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Illustration 6.
Suresh, Sahil and Sumit are partners sharing profits in the ratio of 5 : 3 : 2. During the
year ended 31st March, 2019, the firm earned profit of ` 3,50,000. Prepare Profit & Loss
Appropriation Account giving effect to the following:
(i) Each of the partner is to get remuneration of ` 60,000 p.a.
(ii) Interest on Capital is to be allowed @ 10% p.a. Capitals of Suresh, Sahil and Sumit as on
1st April, 2018 were—` 5,00,000; ` 5,00,000 and ` 7,50,000 respectively.
(iii) Interest on Drawings charged was: Suresh—` 10,000; Sahil—` 20,000; and Sumit—` 25,000.
(iv) Sumit is guaranteed minimum profit of ` 1,50,000 after above appropriations.

Solution: PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2019 Cr.
Particulars
` Particulars `

To Remuneration A/c: By Profit & Loss A/c (Net Profit) 3,50,000

Suresh 60,000 By Interest on Drawings:
Sahil 60,000 Suresh 10,000
Sumit 60,000 1,80,000 Sahil 20,000
To Interest on Capitals: Sumit 25,000 55,000
Suresh 50,000 By Loss transferred to Capital A/cs:
Sahil 50,000 Suresh 62,500
Sumit 75,000 1,75,000 Sahil 37,500 1,00,000
To Sumit’s Capital A/c 1,50,000
(Guaranteed Profit)
5,05,000 5,05,000

Illustration 7 (Manager admitted as a partner and Guarantee of Profit given by one Partner).
X and Y are partners in a firm sharing profits in the ratio of 4 : 1. They decide to admit
Z, their manager, as a partner with effect from 1st April, 2018 for 1/8th share in profits.
Z, as a manager, was getting salary of ` 8,000 per month and commission of 5% of the
net profits after charging such salary and commission.
As per the terms of the Partnership Deed, any excess amount which Z shall be entitled to
receive as a partner over the amount which have been due to him as a manager, would
be borne by X out of his share of profit.
Profit for the year ended 31st March, 2019, amounted to ` 13,56,000 before salary and
commission.
Prepare the Profit & Loss Appropriation Account for the period ending 31st March, 2019.

Solution: PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2019 Cr.
Particulars
` Particulars `
To Profit transferred to:   By Profit & Loss A/c 13,56,000
X’s Capital A/c 9,46,500 (Net Profit)
Y’s Capital A/c 2,40,000
Z’s Capital A/c 1,69,500 13,56,000
13,56,000 13,56,000

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Working Note: Distribution of Profit before admission of Z as a partner: ` `

Profit before Manager’s Salary and Commission 13,56,000
Less: Amount Due to Z as Manager:
Salary (` 8,000 × 12) 96,000
Commission [5/105 (` 13,56,000 – ` 96,000] 60,000 1,56,000
Net Divisible Profit 12,00,000
X’s Share in Profit = ` 12,00,000 × 4/5 = ` 9,60,000; and
Y’s Share in Profit = ` 12,00,000 × 1/5 = ` 2,40,000.
As Z has been admitted as a partner, he is not entitled to get salary of ` 96,000 and commission of
` 60,000. Instead, he will get 1/8th share in the profit = ` 13,56,000 × 1/8 = ` 1,69,500.
The deficiency of ` 13,500 (i.e., ` 1,69,500 – ` 1,56,000) will be borne by X personally.
Thus, Final share in Profits:
X’s Share = ` 9,60,000 – ` 13,500 = ` 9,46,500; Y’s Share = ` 2,40,000; and Z’s Share = ` 1,69,500.

Illustration 8 (Interest on Capitals and Salary not Allowed to Partners, Profit Distributed in Wrong
Ratio).
P, Q and R are partners in a firm. Their Capital Accounts stood at ` 30,000; ` 15,000 and
` 15,000 respectively on 1st April, 2019.
As per the Partnership Deed: (i) R was to be allowed remuneration of ` 3,000 per annum,
(ii) Interest @ 5% p.a. was to be allowed on capital and (iii) Profits were to be distributed
in the ratio of 2 : 2 : 1. Ignoring the above terms, net profit of ` 18,000 for the year ended
31st March, 2020 was distributed among the three partners equally.
Pass an adjustment entry to rectify the errors. Show the workings clearly.
Solution: ADJUSTMENT ENTRY
Date Particulars L.F. Dr. (`) Cr. (`)
2020
April 1 Q’s Capital A/c ...Dr. 450
To P’s Capital A/c 300
To R’s Capital A/c 150
(Adjustment made for omissions in previous year)

Working Note: STATEMENT SHOWING THE ADJUSTMENT TO BE MADE

Particulars P’s Capital A/c Q’s Capital A/c R’s Capital A/c Firm
Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)
1. Profit already distributed 6,000 ... 6,000 ... 6,000 ... ... 18,000
(in the ratio of 1 : 1 : 1)
2. Profit as should be distributed
· Remuneration to R ... ... ... ... ... 3,000 3,000 ...
· Interest on Capital ... 1,500 ... 750 ... 750 3,000 ...
· Net Profit distributed (2 : 2 : 1) ... 4,800 ... 4,800 ... 2,400 12,000 ...
6,000 6,300 6,000 5,550 6,000 6,150 18,000 18,000
3. Net Effect (Dr./Cr.) 300 450 150 Nil
(Cr.) (Dr.) (Cr.)

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Illustration 9 (When Regular Drawings of Fixed Amount are made only for initial 6 months).
A, B and C are partners sharing profits equally. A drew regularly ` 6,000 in the beginning
of every month for the six months ended 30th September, 2019. B drew regularly ` 6,000
at the end of every month for the six months ended 30th September, 2019. C drew regularly
` 6,000 in the middle of every month for the six months ended 30th September, 2019.
Calculate interest on drawings @ 5% p.a. when the books are closed on 31st March
every year.

Solution: Interest on Drawings by A:

P Q R S =Q×R
Date Amount (`) No. of Months up to 31st March, 2020 Product (`)

1st April, 2019 6,000 12 72,000

1st May, 2019 6,000 11 66,000
1st June, 2019 6,000 10 60,000
1st July, 2019 6,000 9 54,000
1st August, 2019 6,000 8 48,000
1st September, 2019 6,000 7 42,000
36,000 3,42,000

5 1
Interest on ` 3,42,000 @ 5% p.a. for one month = ` 3, 42,000    ` 1,425.
100 12
Alternatively, Interest may be calculated for 9.5 months [(12 months + 7 months)/2]
5 9.5
Interest on ` 36,000 @ 5% p.a. for 9.5 months = ` 36 , 000    ` 1, 425.
100 12
Interest on Drawings by B:
P Q R S =Q×R
Date Amount (`) No. of Months up to 31st March, 2020 Product (`)

30th April, 2019 6,000 11 66,000

31st May, 2019 6,000 10 60,000
30th June, 2019 6,000 9 54,000
31st July, 2019 6,000 8 48,000
31st August, 2019 6,000 7 42,000
30th September, 2019 6,000 6 36,000
36,000 3,06,000

Interest on ` 3,06,000 @ 5% p.a. for one month = ` 1,275.

Alternatively, Interest may be calculated for 8.5 months [(11 months + 6 months)/2]
5 8.5
Interest on ` 36,000 @ 5% p.a. for 8.5 months = ` 36 , 000    ` 1, 275.
100 12

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Interest on Drawings by C:

P Q R S =Q×R
Date Amount (`) No. of Months up to 31st March, 2020 Product (`)

15th April, 2019 6,000 11.5 69,000

15th May, 2019 6,000 10.5 63,000
15th June, 2019 6,000 9.5 57,000
15th July, 2019 6,000 8.5 51,000
15th August, 2019 6,000 7.5 45,000
15th September, 2019 6,000 6.5 39,000
36,000 3,24,000

Interest on ` 3,24,000 @ 5% p.a. for 1 month = ` 1,350.

Alternatively, Interest may be calculated for 9 months [(11.5 months + 6.5 months)/2] Interest
5 9
on ` 36,000 @ 5% for 9 months = ` 36 , 000    ` 1, 350.
100 12

Illustration 10.

On 1st April, 2019, Precious, Noble and Perfect entered into partnership with capitals of
` 60,000, ` 50,000 and ` 30,000 respectively.
Perfect advanced ` 10,000 as loan to the partnership firm on 1st October, 2019. The
Partnership Deed has the following clauses:
(i) Interest on capital is to be allowed @ 6% p.a.
(ii) Interest on drawings is to be charged @ 6% p.a. Each partner withdrew ` 4,000 at the
end of each quarter commencing from 30th June, 2019.
(iii) Working partners Precious and Noble to get salary of ` 200 and ` 300 per month
respectively.
(iv) Interest on loan was allowed to Perfect @ 6% p.a.
(v) Noble is to get rent of ` 2,000 per month for use of his building by the firm. It is paid
to him by cheque at the end of every month.
(vi) Profits are shared in the ratio of 4 : 2 : 1 up to ` 70,000 and above ` 70,000 equally.
Profit of the firm for the year ended 31st March, 2020 (before the above adjustments) was
` 1,35,000.
Prepare Profit & Loss Appropriation Account and Capital Accounts of Partners if capitals
are fixed.

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Solution: PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2020 Cr.
Particulars
` Particulars `

To Interest on Capital A/cs: By Profit & Loss A/c (Net Profit) 1,10,700
Precious 3,600 [` 1,35,000 – ` 24,000 (rent) –
Noble 3,000 ` 300 (Interest on Loan)]
Perfect 1,800 8,400 By Interest on Drawings A/cs (Note):
To Partner’s Salaries A/c: Precious 360
Precious 2,400 Noble 360
Noble 3,600 6,000 Perfect 360 1,080
To Profit* transferred to Current A/cs:
Precious 49,127
Noble 29,127
Perfect 19,126 97,380
1,11,780 1,11,780

*Appropriation of Divisible Profit:

Precious (`) Noble (`) Perfect (`)
Profit of ` 70,000 in the ratio of 4 : 2 : 1 40,000 20,000 10,000
Balance Profit ` 27,380 in the ratio of 1 : 1 : 1 9,127 9,127 9,126
49,127 29,127 19,126

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Precious Noble Perfect Particulars Precious Noble Perfect
` ` ` ` ` `
To Balance c/d 60,000 50,000 30,000 By Bank A/c 60,000 50,000 30,000

Dr. PARTNERS’ CURRENT ACCOUNTS Cr.

Particulars Precious Noble Perfect Particulars Precious Noble Perfect
` ` ` ` ` `
To Drawings A/c 16,000 16,000 16,000 By Interest on Capital A/c 3,600 3,000 1,800
To Interest on Drawings A/c 360 360 360 By Partner’s Salaries A/c 2,400 3,600 ...
(Note) By P & L App. A/c (Profit) 49,127 29,127 19,126
To Balance c/d 38,767 19,367 4,566
55,127 35,727 20,926 55,127 35,727 20,926

Notes:
1. When fixed amount is withdrawn at the end of each quarter during the year, interest will be charged on
the whole amount for average period of 4½ months. Thus, interest on drawings to be charged from
each partner will be:

Total Drawings × Rate of Interest 4½

× = ` 16,000 × 9/2 × 1/12 × 6/100 = ` 360.
100 12
2. Interest on Loan from Perfect and rent payable to Noble are charges against profit.

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Illustration 11 (Profits Apportioned without allowing Interest on Capital and Charging Interest
on Drawings).
Mannu and Shristhi are partners in a firm sharing profits in the ratio of 3 : 2. Following
is the Balance Sheet of the firm as on 31st March, 2020:
BALANCE SHEET as at 31st March, 2020
Liabilities
` Assets `
Mannu’s Capital  30,000 Drawings:
Shristhi’s Capital 10,000 40,000 Mannu 4,000
Shristhi 2,000 6,000
Other Assets 34,000
40,000 40,000

Profit for the year ended 31st March, 2020 was ` 5,000 which was divided in the agreed ratio,
but interest @ 5% p.a. on capital and 6% p.a. on drawings was inadvertently omitted. Adjust
interest on drawings on an average basis for 6 months. Give the adjustment entry.
(NCERT, Modified Years)

Solution: ADJUSTMENT ENTRY

Date Particulars L.F. Dr. (`) Cr. (`)
2020
March 31 Shristhi’s Capital A/c ...Dr. 288
To Mannu’s Capital A/c 288
(Adjustment entry passed for omission of interest on capital
and drawings)

Working Notes:
1. For the calculation of Interest on Capital, opening capital is calculated.

CALCULATION OF OPENING CAPITAL AND INTEREST THEREON

Particulars Mannu Shristhi
` `
Closing Capital 30,000 10,000
Add: Drawings already debited* ... ...
30,000 10,000
Less: Profit of ` 5,000 already credited in 3 : 2 3,000 2,000
Opening Capital 27,000 8,000

Interest on Capital @ 5% per annum ` 27,000 × 5/100 = ` 1,350 ` 8,000 × 5/100 = ` 400

* For calculating opening capital, drawings are added. However, drawings of Mannu and Shristhi appear in the
Balance Sheet. It means that their Capital Accounts have not been adjusted for their drawings. Therefore, their
drawings have not been added back.
2. Calculation of Interest on Drawings: Dates of drawings are not given. Therefore, interest on drawings will
be charged for the average period, i.e., 6 months.
Interest on Drawings:
Mannu = ` 4,000 × 6/12 × 6/100 = ` 120; Shristhi = ` 2,000 × 6/12 × 6/100 = ` 60.

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

3. ADJUSTMENT TABLE
Particulars Mannu’s Capital A/c Shristhi’s Capital A/c Firm
Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)
I. Interest on Capital not yet credited ... 1,350 ... 400 1,750 ...
II. Interest on Drawings not yet debited 120 ... 60 ... ... 180
III. Profit after Interest on Capital and Interest on
Drawings ` 3,430 (i.e., ` 5,000 – ` 1,750 + ` 180)
to be credited in the ratio of 3 : 2 ... 2,058 ... 1,372 3,430 ...
IV. Profit of ` 5,000 already distributed now taken
back (debited) 3,000 ... 2,000 ... ... 5,000
3,120 3,408 2,060 1,772 5,180 5,180

Net Effect 288 (Cr.) 288 (Dr.) Nil

Illustration 12 (Guarantee of Profit to a Partner in Case of Loss).

A, B and C are partners having capitals of ` 10,00,000; ` 8,00,000 and ` 6,00,000 respectively in
a firm and sharing profits and losses equally. C is guaranteed a minimum profit of ` 1,00,000
as share of profit every year. The firm incurred a loss of ` 3,00,000 for the year ended
31st March, 2020. You are required to show the necessary accounts for division of loss
and giving effect to minimum guaranteed profit to C.

Solution: PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2020 Cr.
Particulars ` Particulars `
To Profit & Loss A/c (Net Loss) 3,00,000 By Loss transferred to:
A’s Capital A/c 1,00,000
B’s Capital A/c 1,00,000
C’s Capital A/c 1,00,000
3,00,000 3,00,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars A (`) B (`) C (`) Particulars A (`) B (`) C (`)
To Profit & Loss By Balance b/d 10,00,000 8,00,000 6,00,000
Appropriation A/c 1,00,000 1,00,000 1,00,000 By A’s Capital A/c ... ... 1,00,000
To C’s Capital A/c 1,00,000 1,00,000 ... By B’s Capital A/c ... ... 1,00,000
(Guaranteed Profit)
To Balance c/d 8,00,000 6,00,000 7,00,000
10,00,000 8,00,000 8,00,000 10,00,000 8,00,000 8,00,000
Balance b/d
By 8,00,000 6,00,000 7,00,000

Note: C is guaranteed a profit of ` 1,00,000 p.a. Loss incurred by the firm is ` 3,00,000. Out of which ` 1,00,000
is debited to C’s Capital Account. Therefore, C’s Capital Account is to be credited by the amount of
deficiency ` 2,00,000 (` 1,00,000 share of loss debited plus ` 1,00,000 guaranteed profit) which is
met equally by A and B.

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Alternative Method:
Particulars Total (`) A (`) B (`) C (`)
I. Loss for the year as per Profit & Loss Account to be debited to A and B
equally as C is guaranteed minimum profit (3,00,000) (1,50,000) (1,50,000) ...
II. Guaranteed profit of C to be shared by A and B equally ... (50,000) (50,000) 1,00,000
III. Net Effect (3,00,000) (2,00,000) (2,00,000) 1,00,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars A (`) B (`) C (`) Particulars A (`) B (`) C (`)

To Profit & Loss App. A/c 1,50,000 1,50,000 ... By Balance b/d 10,00,000 8,00,000 6,00,000
To C’s Capital A/c 50,000 50,000 ... By A’s Capital A/c ... ... 50,000
(Guaranteed Profit) By B’s Capital A/c ... ... 50,000
To Balance c/d 8,00,000 6,00,000 7,00,000
10,00,000 8,00,000 7,00,000 10,00,000 8,00,000 7,00,000

Illustration 13 (Calculation of Interest on Capital).

A and B started business on 1st April, 2020 with capitals of ` 6,00,000 and ` 4,00,000
respectively. During the year, A introduced ` 1,00,000 as additional capital on 1st October,
2020. They withdrew ` 50,000 per month against profits. Interest on capital is to be allowed
@ 10% per annum.
Calculate interest payable to A and B for the year ended 31st March, 2021.

Solution: Interest on A’s Capital: `

Interest on ` 6,00,000 for one year: ` 6,00,000 × 10/100 60,000
Interest on ` 1,00,000 for 6 months: ` 1,00,000 × 6/12 × 10/100 5,000
(from 1st October, 2020 to 31st March, 2021)
65,000

Interest on B’s Capital:

Interest on ` 4,00,000 for one year: ` 4,00,000 × 10/100 ` 40,000

Illustration 14.
From the following Balance Sheet of X and Y, calculate interest on capital @ 5% p.a. for
the year ended 31st March, 2022:

BALANCE SHEET as at 31st March, 2022

Liabilities
` Assets `

X ’s Capital A/c 90,000 Sundry Assets 2,10,000

Y’s Capital A/c 80,000
General Reserve 40,000
 2,10,000   
2,10,000

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

During the year ended 31st March, 2022, X’s drawings were ` 10,000 and Y’s drawings were
` 30,000. Profit for the year ended 31st March, 2022 was ` 60,000, out of which ` 40,000
is transferred to General Reserve.

Solution:
Calculation of Interest on X’s Capital: `
X ’s Capital as at 31st March, 2022 90,000
Add: Drawings during the year 10,000
1,00,000
Less: Profit (added or credited) [1/2 (` 60,000 – ` 40,000)] 10,000
Capital as at 1st April, 2021 90,000
Interest on capital @ 5% p.a. = ` 90,000 × 5/100 = ` 4,500.
Calculation of Interest on Y ’s Capital: `
Y’s Capital as at 31st March, 2022 80,000
Add: Drawings during the year 30,000
1,10,000
Less: Profit (added or credited) [1/2 (` 60,000 – ` 40,000)] 10,000
Capital as at 1st April, 2021 1,00,000
Interest on Capital @ 5% p.a. = ` 1,00,000 × 5/100 = ` 5,000.
Notes:
1. Capital in the beginning is calculated by adding drawings and deducting profit distributed.
2. Profit during the year was ` 60,000 out of which ` 40,000 is transferred to Reserve and is shown in the Balance
Sheet. Thus, in effect, only ` 20,000 were distributed which have been deducted.
3. In the absence of any profit-sharing ratio being given, partners will share profit and loss equally.

Illustration 15.
A, B and C are partners in a firm sharing profits in the ratio of 4 : 2 : 1. It is provided that
C’s share in profit would not be less than ` 37,500. Profit for the year ended 31st March,
2022 was ` 1,57,500.
Prepare Profit & Loss Appropriation Account.
Solution: PROFIT & LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2022 Cr.
Particulars ` Particulars `
To A’s Capital A/c 90,000 By Profit & Loss A/c 1,57,500
Less: C’s Share of Deficiency 10,000 80,000 —Net Profit
To B’s Capital A/c 45,000
Less:  C’s Share of Deficiency 5,000 40,000
To C’s Capital A/c 22,500
Add:  Deficiency met by:
A 10,000
B 5,000 37,500
1,57,500   1,57,500

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 T.S. Grewal’s Double Entry Book Keeping—Accounting for Not-for-Profit Organisations and Partnership Firms

Working Notes:

1. DISTRIBUTION OF PROFIT
Particulars A B C
Divide Net Profit of ` 1,57,500 ` 1,57,500 × 4/7 = ` 90,000 ` 1,57,500 × 2/7 = ` 45,000 ` 1,57,500 × 1/7 = ` 22,500
in 4 : 2 : 1.

However, C’s Minimum Guaranteed Profit = ` 37,500. Thus, deficiency is of ` 37,500 – ` 22,500 = ` 15,000.
Deficiency met by A and B ` 15,000 × 2/3 = ` 10,000 ` 15,000 × 1/3 = ` 5,000 ...
in 4 : 2 or 2 : 1.
Share of Profit ` 90,000 – ` 10,000 ` 45,000 – ` 5,000 ` 22,500 + ` 10,000 (A)
= ` 80,000 = ` 40,000 + ` 5,000 (B) = ` 37,500

2. Since no specific ratio is given in which the deficiency is to be met, it means A and C shall meet the deficiency
in their profit-sharing ratio, i.e., 4 : 2 or 2 : 1.

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