Q.    X and Y are partners in a firm sharing profit and losses in the ratio of  3 : 2 with capitals of 1000000 and 500000 respectively .as per the partnership deed, they are to be allowed interest on capital @ 8% p.a. the net profit for the yr ended 31 march 2008 before providing for interest on capital amounted to 45000 . show the distribution of profit.

i cann't understand the line the net profit for the year ended 31 march 2008 before providing for interest on capital amounted to 45000. how we calculate the distribution of profit through this.

Note: The net profit for the year ended March 31, 2008 has been assumed as Rs 4,50,000 instead of Rs 45,000.

Profit and Loss Appropriation Account

Dr.

 

Cr.

Particulars 

Amount

(Rs)

Particulars 

Amount

(Rs)

Interest on Capital to-

 

Profit and Loss A/c (Net Profit)

4,50,000

X

80,000

 

 

 

Y

40,000

1,20,000

 

 

Profit transferred to -

 

 

 

X’s Capital A/c

1,98,000

 

 

 

Y’s Capital A/c

1,32,000

3,30,000

 

 

 

4,50,000

 

4,50,000

 

 

 

 

The profit for the year ended can be given either as before charging interest on capital (or salary/commission) or after charging interest on capital (or salary/commission). When the profits are given before charging interest on capital (or salary/commission), then it implies that such items are not deducted from the profits. But in case, profits are given after charging interest on capital (or salary/commission), then it implies that profits are given after deducting such items.

When Net Profit for the year ended given as

Before charging interest on capital

(or salary/commission)

After charging interest on capital

(or salary/commission)

In this case, the given profit is directly shown on the credit side of the Profit and Loss Appropriation Account.

In this case, first of all we add back the interest on capital (or salary/commission) to the given profit and then we show the profit on the credit side of the P&L Appropriation Account.

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