This topic is a part of the UNIT Fundamentals of Partnership Class 12 according to the CBSE curriculum.
It includes two types which are discussed below
Interest on Loan by Partner to firm
If a partner advances a loan to the firm, he is entitled to receive interest at an agreed rate of interest. If there is no agreement as to the rate of interest, partner is entitled to interest on loan @ 6% per annum.
Interest on partner’s loan is a charge against the profits and not an appropriation out of profits, i.e. it is to be allowed whether there are profits or not.
Interest on partner’s loan is an expense for the firm and hence, it is debited to profit and loss account (and not to the debit of profit and loss appropriation account). On the other hand, interest on partner’s loan is a gain to a partner ( in the capacity of a lender ) and hence, it is credited to his loan account and not to his capital account.
Journal Entries regarding Interest on Partner’s Loan of Firm
| For interest due on partner’s loan | Interest on Partner’s Loan A/c Dr To Partner’s Loan A/c |
| For transferring the interest on partner’s loan | Profit and Loss A/c Dr To Interest on Partner’s Loan A/c |
Interest on Loan by the Firm to Partner
When a partner takes a loan from the firm, interest is charged on such loan if partnership deed provide for the same or when the partners have agreed to the rate of interest to be charged on such loan.
In other words, interest is not charged on loan given by the firm, if partnership deed does not provide for the same or agreement to charge interest on such loan does not exist.
Interest on loan given by the firm to partner, is gain for the firm and thus is recorded on the credit side of profit and loss account and debited to partner’s capital / current account.
Journal Entries to record Partner’s Loan from Firm
| For charging interest on loan to partner | Interest on Partner’s Loan A/c Dr To Partner’s Loan A/c |
| For transferring the interest on partner’s loan | Profit and Loss A/c Dr To Interest on Partner’s Loan A/c |
Read more from Fundamentals of Partnership
Profit and Loss Appropriation Account
Salary or commission paid to a partner
Rent paid to partner and Interest on loan
