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karnataka class 12 commerce Accountancy Interest on partners loan accounts

karnataka class 12 commerce Accountancy Interest on partners loan accounts :- we will provide complete details of karnataka class 12 commerce Accountancy Interest on partners loan accounts in this article.

karnataka class 12 commerce Accountancy Interest on partners loan accounts

karnataka class 12 commerce Accountancy Interest on partners loan accounts

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If any partner advances an amount over and above his/her commitment then it is considered as a partners’ loan to the firm with a view to getting it back in the days to come from the partnership as per the valid partnership deed agreed upon. Whenever a partner provides a loan capital to the firm, then it should not be mixed up with his/her originally contributed capital account. Instead of writing in the capital account, a separate account is opened as partners’ loan account. The logic behind the separation of capital and loan account is:
– Partners’ loan is repayable on dissolution in priority to capital
– In the absence of a valid agreement, partners are entitled to get interest on loan, whereas the partners not getting interest on capital.

karnataka class 12 commerce Accountancy Interest on partners loan accounts

There should be a valid written document between the firm and among the partners for the legal purposes. It is hereby advisable ti treat and record the loan provided by the firm to a partner in the partners’ loan account instead of recording to partners’ drawing account.
Interest on partners’ loan to the firm is a charge against profit. Such interest is to be allowed whether there are profit or not. So, interest as a partners’ loan is credited to his loan account and later on it is transferred to the debit of profit and loss account.

karnataka class 12 commerce Accountancy Interest on partners loan accounts

Interest on partners’ loan A/C……………………Dr.

To partners’ loan A/C 

Profit and loss A/C ……………………..Dr.

To interest on partners’ loan A/C

However, interest on partners’ loan may also be taken as an appropriation of profits. So, the following accounting treatment can also be followed:

If the partner receives the interest in cash:
Profit and loss appropriation A/C…………………Dr.

To Interest (cash)

karnataka class 12 commerce Accountancy Interest on partners loan accounts

RATE OF INTEREST ON PARTNERS LOAN TO THE FIRM:

Partners are entitled to receive interest at an agreed rate of interest on any Loan given by them to the firm. Interest on Loan is a charge against profits so a partner is entitled to receive interest wheather there are profits or not. If there is no agreement regarding the rate of interest, it is taken as 6% p.a.

karnataka class 12 commerce Accountancy Interest on partners loan accounts

Interest 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.

karnataka class 12 commerce Accountancy Interest on partners loan accounts

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.

Questions:-  Sohan and mohan are partners sharing profits and losses in the ratiio of 2:3 with the capitals of Rs.500000 and Rs.600000 respectively. On 1st jan 2006 sohan and mohan granted loans of Rs.20,000 and Rs.10,000 respectively to the firm. Show the distribution of profits and losses for the year ended 31st march 2006 if the loss before interest for the year amounted to Rs. 2,500

Answer:- In this question partnership deed is silent on the question of rate of interest to be paid to partners, hence as per Partnership Act, 1932, interest on Partners’ loans will be paid @6% p.a. for three months from 1.1.2006 to 31.3.2006. Calculations are given below:

Sohan: 20000X6/100X4/12 = Rs.300
Mohan: 10000X6/100X4/12=Rs.150
Total =Rs.450
Now loss of the firm after interest on loan comes to Rs.2950 (Rs.2500+Rs.450). Since interest on loan to partners is an expense for the firm, it will come in the Profit & Loss A/c and not in the Profit & Loss Appropriation A/c. Journal entries for this will be:
Profit & Loss A/c Dr. 450
To Sohan’s Loan A/c 300
To Mohan’s Loan A/c 150

P & L Appropriation A/c Dr. 2950
To P & L A/c 2950

Sohan’ Capital A/c Dr. 1180
Mohan’s Capital A/c Dr. 1770
To P & L Appropriation A/c 2950
(Partners debited with their share of total loss in their profit sharing ration 2:3).

 

karnataka class 12 commerce Accountancy Interest on partners loan accounts

Important Note – Preparing for XI & XII Commerce?
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Recommended Read:-karnataka class 12 commerce Accountancy Interest on partners loan accounts

karnataka class 12 commerce Accountancy Interest on partners loan accounts

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