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Interest on capital (₹15000) was wrongly shown on the credit side. Correct treatment is debit side. What is the effect of correction on profit?

Answer and explanation

Correct answer: Profit decreases by (₹30000)

The originally recorded credit of ₹15,000 treated interest on capital as if it increased profit. The correct treatment is a debit of ₹15,000, which reduces profit. To correct the error, the wrong credit must first be cancelled by a debit of ₹15,000. Then the proper debit of ₹15,000 must be recorded. Both changes reduce the previously overstated profit.

Therefore the total reduction is ₹15,000 + ₹15,000 = ₹30,000. The first ₹15,000 removes the incorrect increase, and the second ₹15,000 records the actual expense or appropriation correctly. Hence option A is correct. A reduction of only ₹15,000 would correct just one side of the error and would leave the final profit misstated.

Related tags

PartnershipAdjustmentsInterest Capital Wrong Side

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