Capital Accounts

Debit current account is recoverable from partner. When cash is deposited the recoverable amount decreases so current account is credited.

Under fixed capital method capital ratio is taken from capital accounts. Current account balances are regular adjustments.

Ninety thousand and sixty thousand simplify to three to two. Capital ratio is based on capital balances given in the question.

To find opening capital deduct additional capital and salary from closing capital and add drawings. The result is ninety thousand rupees.

Goods are capital contribution and partners capital account should be credited. Posting to purchases misstates capital contribution.

Net contribution is agreed asset value less loan accepted. Two lakh minus fifty thousand equals one lakh fifty thousand.

Equal debit to one partner and credit to another does not change total capital. It is only internal redistribution of capital.

Under fixed capital profit adjustments go to current accounts. Changing capital accounts would break the fixed method.

Debit balance of current account is recoverable from partner. It should be shown on assets side or adjusted properly.

A credit balance in a partner's current account means the firm owes the partner—so it is a liability. Presenting that credit balance on the assets side misclassifies a liability as an asset, so option A is correct. Option B describes the opposite mistake (a receivable shown as a liability), which is not the error stated. Exam tip: Always check whether the current account is debit or credit — credit balance → liability/payable; debit balance → asset/receivable.

Capital and loan may both be liabilities of firm but their nature is different. Showing them separately is more correct.

Credit in capital account increases partners claim. Debit in appropriation account shows distribution of firm profit.

Interest on drawings is received by firm from partner. Therefore it is credit for firm and debit for partner.

Additional capital is permanent increase and is added even under fixed capital method. Total closing capital is one lakh twenty five thousand.

Normal drawings go to current account and do not reduce capital account. Only capital withdrawal of twelve thousand makes closing capital eighty eight thousand.

Under fluctuating method both types of withdrawal reduce capital account. One lakh minus twenty thousand equals eighty thousand.

Credit items are sixteen thousand and debit items are twenty five thousand. Therefore closing debit balance is nine thousand rupees.

The direct answer is option A: closing capital will appear higher. Interest on drawings is charged to the partner because the partner has used firm money for personal purposes. In the partner’s account, interest on drawings is a debit, so it reduces the closing balance of the partner’s capital or current account, depending on the system used. If the accountant forgets to deduct this interest while finding the closing balance, a reduction that should have been made is omitted. Therefore the calculated closing capital is more than the correct amount. For example, if the balance before this adjustment is Rs 100000 and interest on drawings is Rs 5000, the correct balance is Rs 95000; forgetting the deduction shows Rs 100000, which is higher. Option A is correct. Option B is opposite because omission does not reduce the balance. Option C is wrong because the forgotten adjustment definitely affects the closing balance. Option D is clearly wrong because forgetting one adjustment cannot make capital zero. Exam cue: when a debit or deduction is omitted, the balance usually remains overstated.

If partner account is not credited the partners claim will not increase. Therefore capital appears lower by the interest amount.

If partner account is not debited the recovery of interest is not shown. Therefore his balance remains higher than actual.

When current account is given it often indicates fixed capital method. Separating permanent capital changes and regular adjustments reduces errors.

The governing concept is comparison with the entry that should have been made. Under the fluctuating capital method, drawings should be debited to the partner's capital account, reducing it by Rs 20,000. Instead, the amount was credited, which increases the capital balance by Rs 20,000. The distance between the correct balance effect of minus Rs 20,000 and the erroneous effect of plus Rs 20,000 is Rs 40,000. Therefore, the capital balance is overstated by Rs 40,000, making option A correct. An overstatement of Rs 20,000 would ignore the fact that the correct entry should have reduced capital. The error does not leave the balance unchanged and does not make it understated.

The governing concept is the effect of an incorrect debit replacing a required credit. Interest on capital is an appropriation in favour of the partner and should normally be credited to the partner's capital or current account, increasing the balance by Rs 6,000. If it is wrongly debited, the balance decreases by Rs 6,000 instead. The difference between the correct increase of Rs 6,000 and the erroneous decrease of Rs 6,000 is Rs 12,000. Consequently, the partner's capital balance is understated by Rs 12,000, so option A is correct. An understatement of Rs 6,000 considers only the wrong debit and ignores the missed credit. The balance is not overstated and the error certainly has an effect.

The governing concept is classification according to the substance and agreed nature of a transaction. A deposit by a partner is not automatically the partner's capital contribution. If the money represents A's personal borrowing and A has not agreed to convert it into capital, the firm has received a liability or advance from A. The amount should therefore be transferred out of capital and recorded separately as payable to A, usually through A's loan account or another suitable liability account. Option A is correct. It is not sales because no revenue-producing sale occurred, not drawings because money entered the firm rather than being withdrawn, and not profit because no operating gain was earned. Only a clear agreement can justify treating it as capital.

Add additional capital interest on capital and profit and deduct drawings and interest on drawings. Correct closing capital is two lakh twenty eight thousand rupees.