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CA Foundation · Accounting · Partnership and LLP Accounts

Asha and Bhaskar are partners with no deed provision on interest on capital. Asha's capital is ₹4,00,000 and Bhaskar's is ₹2,00,000. The firm earned a profit of ₹1,20,000 for the year. Asha insists on interest on capital at 10% p.a. How should the profit be dealt with?

No interest on capital is allowed because the deed does not provide for it. The entire profit of ₹1,20,000 is divided equally, giving ₹60,000 to each partner. Interest on capital is payable only by agreement, and then only out of profits.

  1. AInterest of ₹40,000 to Asha and ₹20,000 to Bhaskar is allowed before sharing the rest equally
  2. BNo interest on capital is allowed; profit of ₹1,20,000 is shared equally, ₹60,000 eachCorrect
  3. CInterest is allowed to Asha only, as she has the larger capital
  4. DProfit is shared in capital ratio 2:1, giving Asha ₹80,000 and Bhaskar ₹40,000

Explanation

Without an agreement, no interest on capital is payable, and profits are shared equally. So each partner gets ₹1,20,000 / 2 = ₹60,000. The option allowing interest is wrong because it needs a deed provision.

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