Provisions relating to Interest on Capital in Partnership Class 12 Accountancy

Are you looking the accounting treatment and provisions of Interest on capital in partnership chapter as per the syllabus of class 12 Accountancy CBSE Board.

See, there are different cases and in each situation the treatment of Interest on partners capital is different.

Let’s understand all accounting rules relating to interest on capital in partnership chapter class 12.

Rules of Interest on capital in Partnership Chapter Class 12 Accountancy

Following are the different treatment of Interest on partners capital in various situation.

Case – I

1. When the Partnership Deed does not exist or Partnership Deed does not provide for interest on capital

Provisions:- Interest on Capital is not Allowed.

Case – II

When the Partnership Deed Provides for interest on capital but is silent on whether interest is a charge or appropriation.

Provisions:- Interest on capital is accounted as appropriation of profit. Interest on capital is allowed only if there is profit.

There are three possible cases as follows.

1. Situations – I:-

Loss is incurred.

Interest on capital is not allowed.

2. Situation – II:-

Profit before interest is equal to or more than the interest

Interest on capital is allowed at the agreed rate.

3. Situation – III:-

Profit before interest is less than the interest

Interest is allowed only the extent of profit in the ratio of interest on capital of each partner.

Case III

When the Partnership Deed provides for Interest on capital as a charge (i.e., to be allowed whether there are profit or losses).

In this case, Interest on capital is allowed whether the firm has earned profit or has incurred loss. Such interest is recorded in profit and loss account as expense.

Journal entries to record Interest on capital in parntnership chapter class 12

Following are the two ways journal entries of interest on capital are recorded.

Journal entries of Interest on capital when Partners capital accounts are fixed.

Interest on Capital A/c …Dr.
To Partners Current A/c
(Interest on Capital allowed to partners)

Profit and Loss Appropriations A/c …Dr.
To Interest on Capital A/cs
(interest on capital transferred to profit and loss appropriation account)

Journal entries of Interest on capital when partners capital accounts are fluctuating.

Interest on Capital A/c …Dr
To Partner’s Capital A/c
(Interest allowed on partners capitals)

Profit and Loss Appropriation A/c …Dr
To Interest on Capital A/cs
(Interest on Capital transferred to Profit and Loss Appropriation Account)