43(A). (Omission in Closed Accounts) K, L and M were partners. They started business in one of the remote tribal areas of North-East India. They were interested in the development to the tribal community by providing good education and health. On 31st March, 2020, after taking adjustments for profits and drawings, their capitals were -3,00,000; 2,00,000 and 1,00,000 respectively. Their drawings were: 20,000; 15,000 and 5,000 respectively. The profit earned by the firm for the year ended 31st March, 2020 was 1,80,000. It was later found that interest on capital for the year year ended 31st March @ 6% p.a. was not allowed. Showing your working notes clearly, pass necessary adjustment entry. (C.B.S.E., 2014-AI-C, Set II-modified) [Ans. (i) Opening Capitals: K- 2,60,000; L-1,55,000 and M-45,000; Entry. Dr. M 6,500 and Cr. K 6,400 & L* 100]​

Answer :

To pass the necessary adjustment entry for the omission of interest on capital, follow these steps:

### Working Notes:

1. **Calculate the Opening Capitals:**

Given that the closing capitals on 31st March 2020, after adjusting for profit and drawings, are:

- K: ₹3,00,000

- L: ₹2,00,000

- M: ₹1,00,000

The drawings are:

- K: ₹20,000

- L: ₹15,000

- M: ₹5,000

The profit for the year is ₹1,80,000. Let’s assume profits are shared equally among partners (since the profit-sharing ratio is not specified).

Therefore, profit share for each partner:

- K: ₹60,000

- L: ₹60,000

- M: ₹60,000

Now, calculate the opening capital by reversing the adjustments for drawings and profit:

For K:

\[

\text{Closing Capital} = \text{Opening Capital} + \text{Profit} - \text{Drawings}

\]

\[

3,00,000 = \text{Opening Capital} + 60,000 - 20,000

\]

\[

\text{Opening Capital} = 3,00,000 - 60,000 + 20,000 = 2,60,000

\]

For L:

\[

2,00,000 = \text{Opening Capital} + 60,000 - 15,000

\]

\[

\text{Opening Capital} = 2,00,000 - 60,000 + 15,000 = 1,55,000

\]

For M:

\[

1,00,000 = \text{Opening Capital} + 60,000 - 5,000

\]

\[

\text{Opening Capital} = 1,00,000 - 60,000 + 5,000 = 45,000

\]

2. **Calculate Interest on Capital:**

Interest on Capital is 6% p.a. on the opening capital.

For K:

\[

\text{Interest} = 2,60,000 \times 0.06 = 15,600

\]

For L:

\[

\text{Interest} = 1,55,000 \times 0.06 = 9,300

\]

For M:

\[

\text{Interest} = 45,000 \times 0.06 = 2,700

\]

3. **Adjust the Omission:**

Total Interest on Capital:

\[

15,600 + 9,300 + 2,700 = 27,600

\]

This amount should be deducted from the profit and credited to the partners' capital accounts in proportion to their interest on capital.

The revised profit:

\[

1,80,000 - 27,600 = 1,52,400

\]

Profit per partner:

\[

1,52,400 / 3 = 50,800

\]

Now adjust the omission by comparing the interest on capital received with the revised profit share:

For K:

\[

\text{Interest} = 15,600

\]

\[

\text{Revised Profit Share} = 50,800

\]

\[

\text{Adjustment} = 15,600 - 60,000 = 6,400

\]

For L:

\[

\text{Interest} = 9,300

\]

\[

\text{Revised Profit Share} = 50,800

\]

\[

\text{Adjustment} = 9,300 - 60,000 = 100

\]

For M:

\[

\text{Interest} = 2,700

\]

\[

\text{Revised Profit Share} = 50,800

\]

\[

\text{Adjustment} = 2,700 - 60,000 = 6,500

\]

### Adjustment Entry:

The necessary adjustment entries to correct the omission are:

\[

\text{Dr. M's Capital Account} \, \text{₹6,500}

\]

\[

\text{Cr. K's Capital Account} \, \text{₹6,400}

\]

\[

\text{Cr. L's Capital Account} \, \text{₹100}

\]

Other Questions