X and Y contribute Rs.20000 and Rs.10000 . They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2:3 and the business profit ( before interest ) for the year is Rs.1500. Show the distribution of profit (i). where there is no agreement except for interest on capitals. (ii) . where there is a clear agreement that the interest on capitals will be allowed even if it involves thr firm in loss.
Case 1:When there is no agreement except for interest on capitals
Calculation of Interest on Capital
Interest on X’s capital =
Interest on Y’s capital =
Total Interest on Capital = (Rs 1,200 + Rs 600) = Rs 1,800
Total profits available = Rs 1,500
As the total interest on capital is more than the total profits available, so the profits of Rs 1,500 is to be distributed between X and Y as per their interest on capital ratio.
X : Y
Interest on Capital Ratio = 1,200 : 600, or 2 : 1
Therefore,
Profit and Loss Appropriation Account for the year ended ……  
Dr. 

 Cr.  
Particulars  Amount Rs  Particulars  Amount Rs  
Interest on Capital: 
 Profit and Loss A/c (Net Profit)  1,500  
X  1,000 



Y  500  1,500 


 1,500 
 1,500  



Case 2:When there is a clear agreement for Interest on Capital
Profit and Loss Adjustment Account for the year ended……  
Dr. 

 Cr.  
Particulars  Amount Rs  Particulars  Amount Rs  
Interest on Capital: 
 Profit and Loss A/c (Net Profit)  1,500  
X  1,200 
 Loss transferred to: 
 
Y  600  1,800  X’s Capital A/c  120 


 Y’s Capital A/c  180  300  
 1,800 
 1,800  

