Aakash and Baadal entered into partnership on 1st October 2023 with capitals of Rs 80,00,000 and Rs 60,00,000 respectively. They decided to share profits and losses equally. Partners were entitled to interest on capital @ 10 per annum as per the provisions of the partnership deed. Baadal is given a guarantee that his share of profit, after charging interest on capital, will not be less than Rs 7,00,000 per annum. Any deficiency arising on that account shall be met by Aakash. The profit of the firm for the year ended 31st March 2024 amounted to Rs 13,00,000.
Prepare Profit and Loss Appropriation Account for the year ended 31st March 2024.
Aakash and Baadal entered into partnership on 1st October 2023 with capitals of Rs 80,00,000 and Rs 60,00,000 respectively. They decided to share profits and losses equally. Partners were entitled to interest on capital @ 10 per annum as per the provisions of the partnership deed. Baadal is given a guarantee that his share of profit, after charging interest on capital, will not be less than Rs 7,00,000 per annum. Any deficiency arising on that account shall be met by Aakash. The profit of the firm for the year ended 31st March 2024 amounted to Rs 13,00,000.
Prepare Profit and Loss Appropriation Account for the year ended 31st March 2024.
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Solution and Explanation
Profit and Loss Appropriation Account
for the year ended March 31, 2024
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Interest on Capital: | By Profit & Loss A/c | 13,00,000 | |
| Aakash (₹80,00,000 × 10% × 6/12) | 4,00,000 | ||
| Baadal (₹60,00,000 × 10% × 6/12) | 3,00,000 | ||
| Total Interest on Capital | 7,00,000 | ||
| To Profit Transferred to: | |||
| Aakash Capital A/c | 3,00,000 | ||
| Baadal Capital A/c | 3,00,000 | ||
| Deficiency Met by Aakash | 1,00,000 | ||
| Transferred to Baadal | 1,00,000 | ||
| Aakash's final balance | 3,00,000 – 1,00,000 = 2,00,000 | ||
| Badal's final Balance | 3,00,000 +1,00,000 = 4,00,000 | ||
| To Profit Transferred to: | |||
| Aakash Final Capital A/c | 2,00,000 | ||
| Baadal Final Capital A/c | 4,00,000 | ||
| Total | 13,00,000 | Total | 13,00,000 |
Explanation and Calculations:
- Interest on Capital:
- The partnership was formed on October 1, 2023, and the accounting year ends on March 31, 2024. Therefore, interest is calculated for 6 months (October to March).
- Aakash: ₹80,00,000 × 10% × (6/12) = ₹4,00,000
- Baadal: ₹60,00,000 × 10% × (6/12) = ₹3,00,000
- Divisible Profit:
- Profit before interest on capital: ₹13,00,000
- Total interest on capital: ₹7,00,000
- Divisible profit: ₹13,00,000 - ₹7,00,000 = ₹6,00,000
- Profit Sharing:
- As the Profit is shared equally it's been shared in 1:1 ratio so 6,00,000/2
- Each share will be worth 3,00,000
- Baadal's Guarantee:
- Baadal's guaranteed profit: ₹7,00,000
- Baadal's Actual profit as per calculation: 3,00,000 +3,00,000(I.O.C) =6,00,000
- Therefore, deficiency: ₹7,00,000 -₹ 6,00,000 = ₹1,00,000
- Aakash's Contribution:
- Aakash will cover the entire deficiency of ₹1,00,000. Aakashs' will contribute from her Profit share.
- Final Profit Distribution:
- Aakash:
- Profit Share: ₹3,00,000
- Deficiency borne: ₹1,00,000
- Total capital Balance = ₹2,00,000
- Baadal:
- Profit Share: ₹3,00,000
- Deficiency received from Aakash: ₹1,00,000
- Total capital Balance:₹ 4,00,000
- Aakash:
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