Question

Jay and Vijay were partners in a firm sharing profits and losses in the ratio of 7 : 3. Their respective fixed capitals were ₹9,00,000 and ₹7,00,000. The partnership deed provided for interest on capital @ 8% per annum. After preparing the accounts for the year ended 31\textsuperscript{st March, 2024, it was discovered that interest on capital was allowed @ 9% per annum. Showing your workings clearly, pass the necessary journal entry to rectify the error.}

Hint:

When interest is wrongly credited, calculate the excess/shortfall and adjust partners' capital accounts according to their profit-sharing ratio.

Answer 1

Step 1: Correct Interest on Capital (as per deed @ 8%)
Jay = ₹9,00,000 × 8% = ₹72,000
Vijay = ₹7,00,000 × 8% = ₹56,000

Step 2: Interest on Capital Already Given (@ 9%)
Jay = ₹9,00,000 × 9% = ₹81,000
Vijay = ₹7,00,000 × 9% = ₹63,000

Step 3: Excess Interest Allowed (to be withdrawn)
Jay = ₹81,000 - ₹72,000 = ₹9,000 (excess)
Vijay = ₹63,000 - ₹56,000 = ₹7,000 (excess)
Total excess allowed = ₹9,000 + ₹7,000 = ₹16,000

Step 4: Excess should have been distributed in 7:3 ratio
Jay’s correct share of ₹16,000 = \( \frac{7}{10} \times 16,000 = ₹11,200 \)
Vijay’s correct share of ₹16,000 = \( \frac{3}{10} \times 16,000 = ₹4,800 \)

Step 5: Compare actual vs. correct share
- Jay received ₹9,000 but was entitled to ₹11,200 → Short by ₹2,200
- Vijay received ₹7,000 but was entitled to ₹4,800 → Excess by ₹2,200

Step 6: Rectifying Journal Entry

 

Particulars	Dr. (₹)	Cr. (₹)
Vijay’s Capital A/c	2,200
To Jay’s Capital A/c		2,200
(Being excess interest on capital allowed to Vijay transferred to Jay)