The adjustment is made as follows:
| A's investment, | $7,000.00 | Interest for 30 days | (1 month) | $35.00 |
| A's withdrawals | 200.00 | Interest for 15 days | .50 | |
| ———— | ||||
| Net interest to be credited to A | $34.50 | |||
| B's investment, | $3,000.00 | Interest for 30 days | $15.00 | |
| B's withdrawals, | 100.00 | Interest for 10 days | .17 | |
| ———— | ||||
| Net interest to be credited to B | $14.83 | |||
The journal entry is:
| Interest | $49.33 | |
| A's personal a/c | $34.50 | |
| B's personal a/c | 14.83 | |
| Net interest credited on capital accounts. | ||
After posting the entry, our interest account shows the following:
| Interest on capital | $49.33 |
This account is, of course, closed into profit and loss, leaving net profits to be divided, $954.67, of which A receives 70%, and B 30%.
For the final closing of the books, we would close the personal accounts of A and B into their capital accounts, and close profit and loss account into their capital accounts. In actual practice the interest on withdrawals and investment would be entered and charged to profit and loss through interest account, before the net profit is brought down. In our illustration we have first brought down what appears to be the net profit, for the purpose of emphasizing the fact that the interest must be considered before profits are divided.
EXERCISE
42. C, D, and E formed a partnership Nov. 1. C invested $9,000.00 cash; D invested $7,000.00 cash; E invested $4,000.00 cash. The partnership agreement provided that profits should be shared on the basis of the capital invested by each; interest at 6% to be credited on capital and charged on withdrawals.