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

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Are you looking the accounting treatment and journal entry of interest on the loan by the firm to partner in Accounting for Partnership Firm – Fundamentals chapter of Class 12 CBSE Board

A firm may give a loan to a partner. The partnership firm will charge interest on the load given to the partner by the firm at the rate agreed among the partners.

Lets understand each and every concept in detail.

Table of Contents

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

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

Interest on loan by the firm to partner is considered as income to the firm and credited to profit and loss account. It is charged by the partners and his/her capital or current account is debited.

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

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

It there is an agreement among partners to charge interest on loan to partner by the firm. It is charged at the agreed rate as mentioned in the partnership deed.

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

Following are the journal entry

1. For charging Interest on Loan to Partner:

Partner’s Capital/Current A/c …Dr
To Interest on Loan to Partner A/c

2. Closing entry for interest on loan allowed to partners

For Transfer to Interest On loan

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

Interest on loan to partners in absence of partnership deed

If the Partnership Deed does not provide for charging interest on loan. In another case if partnership does not exist.

In both cases, Interest on loan to partner by the firm is not charged.

Interest on loan by the firm to partner (In absence of Partnership Deed)No Interest is charged

What is the journal entry for interest on loan allowed to a partner?

For Charging Interest
Partner’s Capital/Current A/c …Dr
To Interest on Loan to Partner A/c
For Transfer of Interest on Loan to Partner Account:
Interest on Loan to Partners A/c …Dr
To Profit and Loss A/c

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