Guaranteed Profit, Partner Loan and Drawings Interest
On 1 April 2023, A, B and C began partnership sharing profits 2:2:1. Their opening capitals were ₹3,00,000, ₹2,00,000 and ₹1,50,000. The deed provides interest on capital at 10% p.a. on opening capital, salary to B at ₹4,000 per month, and interest on drawings at 8% p.a. A withdrew ₹30,000 on 1 July 2023; B withdrew ₹24,000 on 1 January 2024; C withdrew ₹18,000 on 1 October 2023. A advanced a loan of ₹50,000 to the firm on 1 October 2023; the deed is silent about interest on loan. Profit for the year before loan interest, capital interest, salary and drawings interest was ₹2,40,000. C has a guaranteed minimum share of divisible profit of ₹50,000, any deficiency to be borne by A. The accountant is unsure whether the loan interest is a charge, how the guarantee works, and whether drawings interest is credited to the profit and loss appropriation account.
1. Compute the amount available for distribution and each partner’s share after the guarantee. State the treatment of A’s loan and C’s guarantee.
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Step 1: A’s loan interest. The deed is silent, so interest is payable at 6% p.a. even if the firm makes a loss. It is a charge against profit, not an appropriation: ₹50,000 × 6% × 6/12 = ₹1,500.
Step 2: Interest on drawings. A: ₹30,000 × 8% × 9/12 = ₹1,800; B: ₹24,000 × 8% × 3/12 = ₹480; C: ₹18,000 × 8% × 6/12 = ₹720. Total = ₹3,000. This is credited to the profit and loss appropriation account.
Step 3: Appropriations. Interest on capital = ₹30,000 + ₹20,000 + ₹15,000 = ₹65,000. B’s salary = ₹4,000 × 12 = ₹48,000. Divisible profit = ₹2,40,000 − ₹1,500 + ₹3,000 − ₹65,000 − ₹48,000 = ₹1,28,500.
Step 4: Shares and guarantee. Normal shares 2:2:1 are A ₹51,400, B ₹51,400, C ₹25,700. C is guaranteed ₹50,000 of divisible profit, so deficiency = ₹50,000 − ₹25,700 = ₹24,300, borne by A. Final shares: A ₹27,100; B ₹51,400; C ₹50,000. Total = ₹1,28,500.
2. Prepare partners’ capital accounts and explain why the loan is not shown in A’s capital account.
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| Particulars | A | B | C |
|---|---|---|---|
| Opening capital | 3,00,000 | 2,00,000 | 1,50,000 |
| Interest on capital | 30,000 | 20,000 | 15,000 |
| Salary | - | 48,000 | - |
| Share of divisible profit | 27,100 | 51,400 | 50,000 |
| Drawings | (30,000) | (24,000) | (18,000) |
| Interest on drawings | (1,800) | (480) | (720) |
| Closing capital | 3,25,300 | 2,94,920 | 1,96,280 |
The loan is not part of A’s capital because it is a debt of the firm to A. It is shown as a liability, and its ₹1,500 interest is a charge. If unpaid, the interest is added to A’s loan account, not his capital account.
3. If the deed had been silent on interest on drawings, what changes would occur? Would the answer to the guarantee change?
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With no interest on drawings, the ₹3,000 credit to the appropriation account disappears. Divisible profit = ₹2,40,000 − ₹1,500 − ₹65,000 − ₹48,000 = ₹1,25,500. Normal shares 2:2:1 are A ₹50,200, B ₹50,200 and C ₹25,100. C is guaranteed ₹50,000, so deficiency = ₹24,900, borne by A. Final shares: A ₹25,300; B ₹50,200; C ₹50,000. The capital accounts would also not be debited with interest on drawings. The guarantee answer does change because the divisible profit and C’s normal share both fall.