Treatment of Interest on loan by Partner to the Firm (Partnership) Class 12

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Are you looking for the accounting treatment or journal entry of interest on loan by the partner to the Firm. I have discussed the accounting treatment of it on the basis of partnership chapter class 12 CBSE Board.

A partner may give a loan to firm. In the case of agreement among partners for interest on loan to firm by the partner. It is allowed at agreed rate.

Otherwise in the absence of partnership deed or if there is no agreement among partners for interest on loan by partners. Interest is allowed @ 6% p.a.

Table of Contents

Accounting Treatment of Interest on loan by the Partner to firm in Partnership chapter class 12

I will discuss the treatment of Interest on loan by the partner to firm as given in partnership chapter of class 12 CBSE Board.

Interest on loan by the partner to the firm is considered an expense to the firm and debited to profit and loss account. It is allowed to the partners and his/her loan account account is credited.

There are two treatment of interest on loan to partner by the firm.

Treatment of Interest on by the partner to the firm if Partnership Deed Allowed it

If there is agreement over it. It is allowed at the rate of mentioned in the partnership dee.

Journal entry of Interest on loan by the firm to partner (If Partnership Deed Allowed)

Following are the journal entry

Interest on loan by the Partner is credited to his Loan Account and not to his Capital Account. Journal entries passed are:To Allow

1. Interest on Loan of the partner to the firm

Interest on Loan by partner A/c …Dr
To Loan by Partner A/c

2. Closing entry for interest on loan allowed to partners

Profit and Loss A/c …Dr
To Interest on Loan by Partner A/c

Journal entry of Interest on loan by the firm to partner in the absence of Partnership Deed

In the absence of partnership deed. Provisions of Indian Partnership Act 1932 would apply. In this case interest on loan of partner to the firm would be allowed @ 6% p.a.

Following are the journal entry

Interest on loan by the Partner is credited to his Loan Account and not to his Capital Account. Journal entries passed are:To Allow

1. Interest on Loan of the partner to the firm

Interest on Loan by partner A/c …Dr
To Loan by Partner A/c

2. Closing entry for interest on loan allowed to partners

Profit and Loss A/c …Dr
To Interest on Loan by Partner A/c

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