whai is the treatment of interest on loan in p/l appropriation a/c??
Answers
Interest on loan is the amount of interest that is paid by the firm on the amount of loan taken from a partner. It is shown on the debit side of the Profit and Loss Account. In case, if interest on loan is not adjusted in the Profit and Loss Account then it will be adjusted through Profit and Loss Appropriation Account. In this account, interest on loan is shown as a deduction form the net profit on the credit side. That is, only after deducting the interest on loan, the remaining profits will considered for appropriation among the partners. This topic has been extensively covered in the Lesson 6 of Chapter 1 of Book 1 in our study material.
However, the treatment of interest on loan and interest on capital is not same in the Profit and Loss Appropriation Account. Interest on capital is shown on the debit side of the Profit and Loss Appropriation Account as a appropriation of profits whereas interest on loan is deducted from the net profit on the credit side of this account. The following are the Journal entries for Interest on Capital and Interest on Loan are given below.