Calculation of Interest on Capital:
Anupam's Interest = 1,50,000 × 8/100 = Rs. 12,000
Abhishek's Interest = 2,00,000 × 8/100 = Rs. 16,000
Total Interest on Capital = Rs. 28,000
Key Principle: As per Accounting Standard-1, interest on capital is a charge against profits and can be allowed only if there are sufficient profits available.
Profit earned during the year = Rs. 14,000
Interest on Capital to be allowed = Rs. 28,000
Since the profit (Rs. 14,000) is less than the interest on capital (Rs. 28,000), only the available profit can be distributed as interest on capital.
Interest on Capital allowed = Rs. 14,000
This Rs. 14,000 will be distributed between partners in the ratio of their entitlement (3:4), meaning:
- Anupam will get: 14,000 × 3/7 = Rs. 6,000
- Abhishek will get: 14,000 × 4/7 = Rs. 8,000
The remaining interest (Rs. 14,000 shortfall) will not be credited to their capital accounts as there are insufficient profits to support it.