Note that A is credited with $180 for his excess of $3,000, and Profit and Loss is debited with the same amount, because it is the business that owes him this interest. If this Profit and Loss debit is distributed separately, A’s share of it is $60, so that his real credit on his $3,000 excess is not $180 but $120. On the other hand, the combined debits to B and C result in a credit to Profit and Loss of $360, and if this item is distributed as such, A’s share of it is $120, thus making his total credit on the complete adjustment $240. A similar explanation applies to the adjustments for B and C.
Second Method.
The first method was based on a consideration of the respective excesses or deficits on capital investments, but the same result may be obtained by comparing all contributions with the amount of the smallest investment, viz., $11,000 by C. This would show A’s excess over C as $7,000, and B’s excess over C as $2,000, and these two amounts may be treated as loans to the business. The result is that A is credited with 6% on $7,000, and B with 6% on $2,000, as follows:
| Profit and Loss | 540.00 | ||
| A | 420.00 | ||
| B | 120.00 | ||
The debit to Profit and Loss is charged in equal shares to the three partners as follows:
| A | 180.00 | ||
| B | 180.00 | ||
| C | 180.00 | ||
| Profit and Loss | 540.00 | ||
The final result shows a net credit to A of $240, a net debit of $60 to B, and a net debit of $180 to C, the same as by the first method.
Third Method.
The total capital contributed is $42,000. To be equal partners under the agreement, each should have contributed one-third of the common fund, or $14,000. Actually, A’s investment is $4,000 in excess of this, while B’s is $1,000 less, and C’s $3,000 less. The excess contribution of A, $4,000, may be looked upon as a loan to B and C as individuals, bringing their shares up to the $14,000; viz., $1,000 to B and $3,000 to C. Instead of making the adjustment through the Profit and Loss account as in the first two methods, the interest is now adjusted between the three partners as private persons, the entries affecting only the partners’ personal accounts. This adjustment results in a credit to A and a debit to B for $60, A having loaned B $1,000; and in a credit to A and a debit to C for $180, A having loaned C $3,000. A’s total credit is $240, and B’s and C’s debits are respectively $60 and $180, the same as by the other two methods.
Thus it is seen that any of the three methods employed leads to the same results. It will be observed, however, that in the example given the contemplated investments are to be equal for the three partners ($15,000), and the profit and loss is to be shared on the same basis. The three different methods of adjusting interest lead to the same result only when the profit-sharing ratio is identical with the ratio between the contemplated investments.