6Interest on partners loan: It is a charge against profits. It is provided irrespective of profits or loss. It will also be provided in the absence of Partnership Deed @ 6% per annum. The following entries are passed to record the interest on partner’s loan:
- For allowing Interest on loan: Interest on Partner’s Loan A/c Dr. To Partner’s Loan A/c (Being interest on loan allowed @___% p.a.)
- For transferring Interest on Loan to Profit and Loss A/c: Profit and Loss A/c Dr. To Interest on Loan A/c (Being interest on loan transferred to P & L A/c) It is always DEBITED to Profit and Loss A/c Rent paid to a partner is also a charge against profits and it will also be DEBITED to Profit and Loss A/c.
Example: A and B entered into partnership on 1st April, 2010 without any partnership deed. They
introduced capitals of Rs. 5, 00,000 and Rs. 3, 00,000 respectively. On 31st October,
2010, A advanced Rs. 2, 00,000 by way of loan to the firm without any agreement as to
interest. The Profit and Loss Account for the year ended 31032011
showed a profit of Rs. 4,30,000 but the partners could not agree upon the amount of interest on Loan to be
charged and the basis of division of profits. Pass a Journal Entry for the distribution of the Profits between the partners and prepare the Capital A/cs of both the partners and Loan A/c of ‘A’.
Solution: Profit and Loss Appropriation Account. For the year ending on 31st March, 2011 Dr. Cr. Particulars "Particulars". To Profits transferred to By Profit and Loss A/c Capital A/c of A : Rs. 2,12,500 (Net Profits 4,30,000) B: Rs 2,12,500. Less : Interest on Rs 4,25,000 A's Loan (5,000) Rs 4,25,000 Rs 4,25,000 Rs 4,25,000 Dr. Partner's Capital A/cs Cr Date Particular A B Date Particular A B 31.03.2011 To 01.04.2010 By Bank A/c 5,00,000 3,00,000 Balance 7,12,500 5,12,500 31.03.2011 By Profit and c/d Loss Appropriation A/c 2,12,500 2,12,500 7,12,500 5,12,500 7,12,500 5,12,500. JOURNAL Date Particulars L.F. Debit Credit Rs. Rs. 31.03.2011 Profit and Loss Appropriation A/c Dr 4,25,000 To A's Capital A/c 2,12,500To B's Capital A/c 2,12,500 (Being profit distributed among the partners) Dr. A's Loan A/c Cr.
Date Particulars Amount Date Particulars Amount Rs. 2011 To Balance c/d 2,05,000 2010 March, Oct., 31 By Bank A/c 2,00,000 31 2011 March, 31 By Interest on Loan A/c 5,000 2,05,000 2,05,000. Note : Interest on A's Loan = Loan Amount x Rate /100x Time Left after Loan Taken/12 = 2,00,000x 6/100x 05/12 = Rs.5,000.
