Adjustment Entry for Incorrect Interest on Capital Calculation

**Introduction:**
In this scenario, partners A, B, and C share profits and losses in the ratio of 2:1:2. Their fixed capitals are Rs 30,000, Rs 1,00,000, and Rs 2,00,000 respectively. However, on 31st March 2021, interest on capital was credited at a rate of 9% instead of the agreed rate of 10%. To rectify this error, an adjustment entry needs to be made in the books of accounts.

**Adjustment Entry:**
To correct the interest on capital calculation, the following adjustment entry should be made:

Date: 31st March 2021

Particulars | Debit (Rs) | Credit (Rs)
--- | --- | ---
Interest on Capital A/C | 500 |
Interest on Capital A/C | 500 |

Explanation of the Adjustment Entry:

**1. Interest on Capital A/C (Debit):**
As the interest on capital was credited at a lower rate, an adjustment needs to be made to increase the interest amount. The interest on capital A/C is debited to rectify the error.

**2. Interest on Capital A/C (Credit):**
The interest on capital A/C is also credited by the same amount to nullify the effect of the debit entry. This ensures that the overall accounting equation remains balanced.

**Calculation of Adjustment Amount:**
To calculate the adjustment amount, the difference between the correct interest on capital and the interest already credited needs to be determined.

Total Fixed Capital = Rs 30,000 + Rs 1,00,000 + Rs 2,00,000 = Rs 3,30,000

Interest on Capital at 10% = (10/100) * Rs 3,30,000 = Rs 33,000

Interest already credited at 9% = (9/100) * Rs 3,30,000 = Rs 29,700

Adjustment Amount = Rs 33,000 - Rs 29,700 = Rs 500

**Conclusion:**
By making the adjustment entry of debiting and crediting the Interest on Capital A/C with the correct adjustment amount, the error in the interest on capital calculation can be rectified. This ensures that the partners' capital accounts are properly adjusted and reflect the correct interest on capital.