Q4
1 markMCQSection A

(a) Tarun and Tej were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April 2024, Tej had given a loan of Rs. 50,000 to the firm. The net profit of the firm before charging interest on loan was Rs. 3,75,000. The firm closes its books on 31st March every year. The amount of profit transferred from Profit and Loss Account to Profit and Loss Appropriation Account will be :

(A) Rs. 3,75,000 (B) Rs. 3,72,000 (C) Rs. 4,25,000 (D) Rs. 3,78,000

OR

(b) Ashok and Vasu were partners in a firm sharing profits and losses in the ratio of 4 : 3. Their capitals on 31st March, 2025 were Rs. 3,00,000 and Rs. 3,75,000 respectively. During the year ended 31st March, 2025 Vasu withdrew Rs. 40,000 for his personal use and introduced Rs. 1,50,000 as additional capital in the business. Profit of the firm for the year ended 31st March, 2025 was Rs. 1,40,000. Vasu's capital in the beginning of the year was :

(A) Rs. 2,75,000 (B) Rs. 4,25,000 (C) Rs. 2,05,000 (D) Rs. 3,45,000

Accounting for Partnership: Basic Concepts
Interest on Partner's Loan — Charge Against Profit

Options

(A)Rs. 3,75,000
(B)Rs. 3,72,000
(C)Rs. 4,25,000
(D)Rs. 3,78,000
Official Answer

Correct option: (B) Rs. 3,72,000.


In the absence of a partnership deed provision, interest on a partner's loan to the firm is allowed @ 6% p.a. as per the Indian Partnership Act, 1932, and is a charge against profit (debited to the Profit and Loss Account, not the Appropriation Account).


  • Interest on Tej's loan = Rs. 50,000×6%×1 year=Rs. 3,000\text{Rs. }50,000 \times 6\% \times 1\text{ year} = \text{Rs. }3,000
  • Profit transferred to P&L Appropriation A/c = Rs. 3,75,000−Rs. 3,000=\text{Rs. }3,75,000 - \text{Rs. }3,000 = Rs. 3,72,000
interest on partner's loancharge against profitprofit and loss appropriation accountIndian Partnership Act 19326% per annumcapital account

Marking Scheme

  • 11 mark: for correctly selecting option (B) with the working Rs. 3,75,000−Rs. 3,000 (interest on loan @ 6%)=Rs. 3,72,000\text{Rs. }3,75,000 - \text{Rs. }3,000 \text{ (interest on loan @ 6\%)} = \text{Rs. }3,72,000.

Hint

Interest on partner's loan is always a charge, deducted before profit reaches the Appropriation Account; use 6% p.a. when the deed is silent.

Quick Oral Answer

Interest on partner's loan is a charge against profits, calculated at 6% p.a. when the deed is silent; here Rs. 50,000×6%=Rs. 3,000\text{Rs. }50,000 \times 6\% = \text{Rs. }3,000 is deducted from Rs. 3,75,000, leaving Rs. 3,72,000 for the Appropriation Account.

Analysis & Explanation

Concept: Interest on a partner's loan (as distinct from interest on capital) is a charge against profits, meaning it must be deducted while preparing the Profit and Loss Account itself — before profit reaches the Profit and Loss Appropriation Account — irrespective of whether the firm earns a profit or incurs a loss.


Rate applicable: Since the question does not state a partnership-deed rate for Tej's loan, Section 13(d) of the Indian Partnership Act, 1932 mandates 6% p.a. as the default rate.


Working:

  • Loan = Rs. 50,000 for the full year (1st April 2024 to 31st March 2025)
  • Interest=50,000×6/100=Rs. 3,000\text{Interest} = 50,000 \times 6/100 = \text{Rs. }3,000
  • Amount transferred to Appropriation A/c=Rs. 3,75,000−Rs. 3,000=Rs. 3,72,000\text{Amount transferred to Appropriation A/c} = \text{Rs. }3,75,000 - \text{Rs. }3,000 = \text{Rs. }3,72,000

Why other options are wrong:

  • (A) Rs. 3,75,000 ignores interest on loan entirely — treats it as if no interest is payable.
  • (C) Rs. 4,25,000 wrongly ADDS interest instead of deducting it.
  • (D) Rs. 3,78,000 again wrongly adds Rs. 3,000 instead of deducting it.

OR Part (b) — for reference: Vasu's closing capital Rs. 3,75,000 = Opening capital + Additional capital (Rs. 1,50,000) − Drawings (Rs. 40,000) + Share of profit (3/7×1,40,000=Rs. 60,0003/7 \times 1,40,000 = \text{Rs. }60,000). So Opening capital = 3,75,000−1,50,000+40,000−60,000=3,75,000 - 1,50,000 + 40,000 - 60,000 = Rs. 2,05,000, i.e., option (C).

Common Mistakes

  1. 1Treating interest on partner's loan as an appropriation (dependent on availability of profit) instead of a charge, which must be provided even in case of a loss.
  2. 2Using a rate other than 6% p.a. when the partnership deed is silent on the rate for a partner's loan.
  3. 3Adding interest on loan to profit instead of deducting it before transfer to the Appropriation Account.

Interesting Facts

Interest on partner's loan is one of the very few items always debited to the Profit and Loss Account (not the Appropriation Account) even when the firm has a net loss for the year.

Under Section 13(d) of the Indian Partnership Act, 1932, a partner is entitled to interest at 6% p.a. on money advanced as a loan (beyond agreed capital) whether or not the firm earns a profit.

Spotted a mistake or something unclear?

Tell us — we fix reported answers fast.

Frequently Asked Questions

Why is interest on partner's loan a charge and not an appropriation?

A charge is an expense that must be deducted to arrive at true profit and is payable even if the firm makes a loss, unlike an appropriation (like interest on capital) which depends on the firm making a profit. Interest on partner's loan is treated as a business expense, debited to the Profit and Loss Account itself.

What rate of interest applies to a partner's loan if the deed is silent?

As per Section 13(d) of the Indian Partnership Act, 1932, interest at 6% p.a. is payable on a partner's loan to the firm when the partnership deed does not specify a rate.