Question

how is interest on partners loan account treated?​

Answer 1

Answer:

If the loan was created by converting a proportion of the partner's capital into a loan, the debit entry will be in the capital account. The interest on theloan will be a business expense and should therefore be debited to the income statement. Based on the following information:- prepare thepartners' current accounts.

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Answer 2

Explanation:

How are loans from partners treated?

A loan is not part of the partner’s capital, and the loan is treated is the same way as a loan from a third party. The liability of the partnership will be recorded by the creation of a liability, resulting in a credit balance for the amount of the loan. The debit entry will depend on how the loan was made. If the partner deposited cash in the bank account, the debit entry will be in the bank account. If the loan was created by converting a proportion of the partner’s capital into a loan, the debit entry will be in the capital account.

The interest on the loan will be a business expense and should therefore be debited to the income statement.

Examples

(i) – Appropriations of profit

Based on the following information:

prepare the Partnership Appropriation Account

calculate each partner’s share of the residual profit and total profit share

prepare the partners’ current accounts

Amit and Burton are in partnership sharing profits in the ratio 3:2. The partnership’s profit for the year was $65,460. The partnership agreement provides for:

interest to be paid on the partners’ opening capital balances at a rate of 5% per annum

interest on drawings at a rate of 8% per annum on all drawings during the year

partners’ salaries of Amit, $9,000; Burton, $5,000.

At the beginning of the year, the partners’ capital and current account balances were:

Capital Current

Amit $120,000 Cr £15,655 Cr

Burton $80,000 Cr $4,137 Dr

During the year, Amit’s drawings were $18,000 and Burton’s drawings were $31,000.

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