Interest
on loan from partners
Sometimes, a partner may
provide loan or advance to the firm. In such cases, partner’s loan or advance
account is to be separately maintained in the books. The partners are entitled
to interest on the loan or advance at the rate agreed by them. If there is no
such agreement, the partners are entitled to an interest at the rate of 6 per
cent per annum [Section 13(d) of the Indian Partnership Act, 1932]. The
following journal entries are to be made in the books of the firm:
Note: Interest on partner’s
loan being an expense to the firm is debited in firm’s books. Interest on
loan is due to the partner and it is generally added to the loan amount due and
hence partner’s loan account is credited.
Tutorial note: Interest on partners’ loan is a charge against profit, that is, whether there is profit or loss for the firm, this interest is to be provided. Hence, interest on partners’ loan is transferred to profit and loss account.
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