Adjustment Entry for Interest on Capital

To correct the error of crediting interest on capital @10% instead of 12% p.a, the following adjustment entry needs to be passed:

Date: [Date of Adjustment]

Particulars | L.F. | Amount (Rs.)
------------|-----|-------------
Interest on Capital A/c | Dr. | 16,000
To A's Capital A/c | | 4,000
To Interest on Capital A/c | | 12,000
(Adjustment entry for crediting interest @12% p.a instead of 10% p.a)

Explanation

As per the given information, A, B, and C are partners having capitals of Rs.4,00,000, Rs.3,00,000, and Rs.2,00,000 respectively. The interest on capital was credited @10% instead of 12% p.a.

To rectify this error, the adjustment entry for interest on capital needs to be passed. As per the partnership agreement, the interest on capital is to be credited @12% p.a. Therefore, the interest on capital needs to be adjusted by Rs.16,000 (i.e., Rs.1,000 per annum per Rs.1,00,000 of capital) for the entire year.

In the above adjustment entry, the Interest on Capital A/c is debited with Rs.16,000 to rectify the error of crediting interest @10% p.a. To adjust the capital accounts of the partners, A's Capital A/c is credited with Rs.4,000 (i.e., 10% of Rs.4,00,000), and the remaining amount of Rs.12,000 (i.e., 10% of Rs.3,00,000 + 10% of Rs.2,00,000) is credited to Interest on Capital A/c.

Conclusion

The above adjustment entry for Interest on Capital rectifies the error of crediting interest @10% instead of 12% p.a. by debiting the Interest on Capital A/c and adjusting the capital accounts of the partners. This adjustment entry ensures that the interest on capital is credited as per the partnership agreement, and the capital accounts of the partners reflect the correct amount of interest on capital.

C's capital acc Dr 2000
To A's capital acc 2000