Q.In the absense of partnership-deed, what are the rules (provisions) for interest on partner's capital?

Showing the 12 most recent of 72 on this concept.

1. CBSE 2026Set 67/3/11 markMCQ
   Q.(a) Atul, Bajaj and Madan were partners in a firm sharing profits and losses in the ratio of 1 : 2 : 5. The partnership deed provides that interest on a partner's drawings shall be charged @ 18% per annum. During the year ended 31st March, 2025, Bajaj withdrew ₹ 7,000 at the end of each quarter. Interest on Bajaj's drawings will be : (A) ₹ 1,890 (B) ₹ 3,150 (C) ₹ 420 (D) ₹ 5,040

   (OR)

   (b) Damodar, Rao and Shridharan were partners in a firm sharing profits and losses in the ratio of 3 : 1 : 1. Their fixed capitals were ₹ 4,00,000; ₹ 3,00,000 and ₹ 2,00,000 respectively. Interest on capital is allowed at the rate of 6% per annum. Journal entry for allowing interest on Rao's capital will be : (A) Profit & Loss Appropriation A/c Dr. — Debit ₹ 18,000 | To Rao's Capital A/c — Credit ₹ 18,000 (B) Profit & Loss Appropriation A/c Dr. — Debit ₹ 18,000 | To Rao's Current A/c — Credit ₹ 18,000 (C) Interest on Capital A/c Dr. — Debit ₹ 18,000 | To Rao's Current A/c — Credit ₹ 18,000 (D) Interest on Capital A/c Dr. — Debit ₹ 18,000 | To Rao's Capital A/c — Credit ₹ 18,000

   ›Reveal solutionSolution

   Part (a): Interest on Bajaj's drawings = ₹1,890 (option A). Part (b): Interest on Rao's capital ₹18,000 debited to Interest on Capital A/c and credited to Rao's Current A/c (option C).

   Part (a)

   When a fixed amount is withdrawn at equal intervals, interest on drawings is found by the average period method.

   Interest on Drawings = Total Drawings × Rate × (Average Period ÷ 12)

   Working Note

   • Total drawings = 7,000 × 4 = ₹28,000.
   • Withdrawal at the end of each quarter: first drawing (30 Jun) has 9 months to run; last drawing (31 Mar) has 0 months. Average period = (9 + 0) ÷ 2 = 4.5 months. …

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2. CBSE 2026Set 67/3/11 markMCQ
   Q.Divya and Bholi were partners in a firm sharing profits and losses in the ratio of 3 : 1. On 1st April, 2024, their fixed capitals were ₹ 8,00,000 and ₹ 6,00,000 respectively. On 30th September, 2024, Bholi introduced ₹ 50,000 as additional capital. Partnership deed provided that interest on capital will be allowed @ 12% p.a. Interest on Bholi's capital for the year ended 31st March, 2025 was : (A) ₹ 78,000 (B) ₹ 75,000 (C) ₹ 72,000 (D) ₹ 3,000

   ›Reveal solutionSolution

   The interest on Bholi's capital for the year ended 31st March, 2025, is ₹75,000.

   In a partnership firm, interest on capital is an allowance provided to partners for contributing capital to the business. It is typically calculated at a specified rate on the opening capital balance for the entire accounting period. However, if a partner introduces additional capital during the year, interest is calculated on this additional amount only for the period it remained in the business. This ensures fairness, as partners are compensated for the exact duration their capital was employed by the firm.

   Interest on capital is considered an appropriation of profits, not a charge against profits. This means it is allowed only if there are sufficient profits; if profits are less than the total interest on capital, the interest is allowed only to the extent of profits, distributed in the ratio of capital. If there are losses, no interest on capital is allowed.

   To calculate Bholi's interest on capital, we need to consider her initial capital and the additional capital introduced, along with the respective periods for which each amount was outstanding.

   Solution

   The interest on Bholi's capital for the year ended 31st March, 2025 is calculated as follows:

   1. Interest on Initial Capital:

      Bholi's initial fixed capital on 1st April, 2024, was ₹6,00,000. This capital remained in the business for the entire financial year (12 months).

      Interest = ₹6,00,000 $\times$ 12% $\times$ (12/12) = ₹72,000

   2. Interest on Additional Capital:

      Bholi introduced additional capital of ₹50,000 on 30th September, 2024. This means the additional capital was available to the firm from 1st October, 2024, until the end of the financial year, 31st March, 2025. This period is 6 months (October, November, December, January, February, March).

      Interest = ₹50,000 $\times$ 12% $\times$ (6/12) = ₹3,000

   3. Total Interest on Bholi's Capital:

      Total interest on Bholi's capital for the year is the sum of interest on her initial capital and interest on her additional capital.

      Total Interest = ₹72,000 + ₹3,000 = ₹75,000 …

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3. CBSE 2026Set 67/4/11 markMCQ
   Q.Ankur and Angad were partners in a firm sharing profits and losses in the ratio of 8 : 7. On 1st July, 2024, Angad advanced a loan of ₹ 8,00,000 to the firm. There is no partnership deed. Angad demands interest on loan @ 10% p.a. On 31st March, 2025, the amount of interest on loan due to Angad will be : (A) ₹ 36,000 (B) ₹ 48,000 (C) ₹ 80,000 (D) ₹ 60,000

   ›Reveal solutionSolution

   When there is no partnership deed, interest on a partner's loan is allowed at 6% per annum as per the Indian Partnership Act, 1932. For Angad's loan of ₹8,00,000 for 9 months, the interest due is ₹36,000.

   In partnership accounting, the absence of a partnership deed is a critical factor. When partners do not have a written agreement, or if the existing deed is silent on a particular matter, the provisions of the Indian Partnership Act, 1932, automatically apply. This Act serves as a default framework to ensure fairness and prevent disputes.

   One of the key provisions of this Act, specifically Section 13(d), addresses interest on a partner's loan to the firm. It states that if a partner has advanced a loan to the firm, they are entitled to receive interest on that loan at a rate of 6% per annum. This is a statutory right and overrides any personal demands made by a partner, such as Angad's demand for 10% interest in this case.

   Important

   When there is no partnership deed, or the deed is silent, the Indian Partnership Act, 1932, applies. As per Section 13(d) of this Act, a partner is entitled to interest on a loan advanced to the firm at 6% per annum.

   It is also crucial to understand that interest on a partner's loan is considered a charge against profits, not an appropriation of profits. This means it must be paid whether the firm makes a profit or incurs a loss. It is treated as an expense of the business, similar to interest paid on a loan from an external party, and is debited to the Profit & Loss Account.

   Working Notes

   1. Applicable Rate of Interest on Loan:

      Since there is no partnership deed, the provisions of the Indian Partnership Act, 1932, apply. As per Section 13(d) of the Act, interest on a partner's loan is allowed at 6% per annum.

      Watch out

      Angad's demand for 10% p.a. interest is not applicable in the absence of a partnership deed explicitly stating this rate. The statutory rate of 6% p.a. must be followed.

   2. Period for which Interest is Due:

      Angad advanced the loan on 1st July, 2024. The accounting period ends on 31st March, 2025.

      The period for which interest is due is from 1st July, 2024, to 31st March, 2025.

      This duration covers July, August, September, October, November, December, January, February, and March.

      Number of months = 9 months.

   3. Calculation of Interest on Angad's Loan:

      Loan Amount = ₹8,00,000

      Rate of Interest = 6% p.a. (as per Indian Partnership Act, 1932)

      Period = 9 months

      Interest on Loan = Loan Amount $\times$ Rate $\times$ Period

      Interest on Loan = ₹8,00,000 $\times \frac{6}{100} \times \frac{9}{12}$

      Interest on Loan = ₹48,000 $\times \frac{9}{12}$

      Interest on Loan = ₹4,000 $\times 9$

      Interest on Loan = ₹36,000 …

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4. CBSE 2026Set 67/4/11 markMCQ
   Q.Anita and Priyal were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April, 2024, their capital accounts showed balances of ₹ 3,00,000 and ₹ 4,00,000 respectively. The partnership deed provided for interest on capital @ 8% p.a. The firm earned a profit of ₹ 28,000 for the year ended 31st March, 2025. Interest on capital allowed to Anita and Priyal was : (A) Anita ₹ 24,000, Priyal ₹ 32,000 (B) Anita ₹ 16,000, Priyal ₹ 12,000 (C) Anita ₹ 12,000, Priyal ₹ 16,000 (D) Anita ₹ 16,800, Priyal ₹ 11,200

   ›Reveal solutionSolution

   When the available profit is less than the total interest on capital due, the interest on capital is restricted to the available profit and distributed among partners in the ratio of their individual interest entitlements. For Anita and Priyal, the interest on capital allowed will be ₹12,000 and ₹16,000 respectively.

   In partnership accounting, the treatment of interest on capital is a crucial concept, especially when the firm's profit is insufficient to cover the full amount of interest. Interest on capital is generally considered an appropriation of profit, not a charge against profit. This means it is paid only if there are profits, and only to the extent of available profits.

   Here's the rule:

   If the partnership deed provides for interest on capital, but it does not explicitly state that interest on capital is a charge against profits (meaning it must be paid even if it results in a loss), then it is treated as an appropriation. In such cases, if the total amount of interest on capital due to all partners exceeds the net profit available for appropriation, the interest on capital is restricted to the available profit. This available profit is then distributed among the partners in the ratio of their individual interest on capital entitlements.

   Let's apply this concept to the given problem.

   Working Notes

   1. Calculation of Anita's full Interest on Capital:

      Anita's Capital = ₹3,00,000

      Interest Rate = 8% p.a.

      Full Interest on Capital for Anita = ₹3,00,000 $\times$ 8/100 = ₹24,000

   2. Calculation of Priyal's full Interest on Capital:

      Priyal's Capital = ₹4,00,000

      Interest Rate = 8% p.a.

      Full Interest on Capital for Priyal = ₹4,00,000 $\times$ 8/100 = ₹32,000

   3. Total full Interest on Capital:

      Total full Interest on Capital = Anita's Interest + Priyal's Interest

      Total full Interest on Capital = ₹24,000 + ₹32,000 = ₹56,000

   4. Comparison with Available Profit:

      Firm's Profit for the year = ₹28,000

      Total full Interest on Capital = ₹56,000

      Since the firm's profit (₹28,000) is less than the total full interest on capital (₹56,000), the interest on capital will be restricted to the available profit of ₹28,000.

      Watch out

      A common mistake is to simply pay the full interest on capital, which would result in a loss for the firm. Interest on capital is an appropriation, not a charge, unless the deed explicitly states otherwise. Therefore, it cannot exceed the available profit.

   5. Ratio for distributing restricted Interest on Capital: …

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5. CBSE 2026Set 67/5/11 markMCQ
   Q.Munna and Sonu were partners in a firm sharing profits and losses in the ratio of 4 : 1. Their fixed capitals were ₹ 40,00,000 and ₹ 30,00,000 respectively. During the year ended 31st March, 2025, Munna withdrew ₹ 50,000 for personal use. Interest on drawings was to be charged @ 6% p.a. The journal entry for charging interest on Munna’s drawings will be : (A) Interest on Drawings A/c Dr. — Debit ₹ 1,500 | To Munna’s Capital A/c — Credit ₹ 1,500 (B) Munna’s Capital A/c Dr. — Debit ₹ 1,500 | To Interest on Drawings A/c — Credit ₹ 1,500 (C) Interest on Drawings A/c Dr. — Debit ₹ 1,500 | To Munna’s Current A/c — Credit ₹ 1,500 (D) Munna’s Current A/c Dr. — Debit ₹ 1,500 | To Interest on Drawings A/c — Credit ₹ 1,500

   ›Reveal solutionSolution

   Munna's Current A/c Dr. ₹1,500 | To Interest on Drawings A/c Cr. ₹1,500 — the correct entry is (D).

   Concept: Interest on Drawings in a Partnership

   When a partner withdraws money for personal use, the partnership charges interest on those drawings to compensate the firm for the loss of capital employed. This interest is an appropriation of profit (not a charge against profit like interest on a loan), meaning it reduces the partner's share of distributable profit.

   Accounting Treatment

   The entry for charging interest on drawings involves two steps conceptually, though in practice we often combine them:

   1. Interest on Drawings Account is credited (it is an income to the firm, increasing the pool available for appropriation).
   2. The partner's account is debited (the partner owes this amount to the firm; it reduces his claim).

   Because the firm maintains fixed capital accounts (capitals are ₹40,00,000 and ₹30,00,000 and remain unchanged), all adjustments for interest, salary, drawings, and profit shares flow through the Current Accounts of the partners. The fixed capital method keeps the Capital Account static; the Current Account is the working account that absorbs all operational adjustments.

   Thus the journal entry is:

   Partner's Current A/c Dr.

   To Interest on Drawings A/c

   This debits the partner's Current Account (reducing his balance or increasing his debit balance) and credits Interest on Drawings, which will later be transferred to the Profit & Loss Appropriation Account on the credit side, increasing distributable profit.

   Watch out

   A common mistake is to debit "Interest on Drawings A/c" thinking it is an expense. Interest on drawings is not an expense; it is an appropriation item (a recovery from the partner). The Interest on Drawings Account is credited, not debited.

   ---

   Solution

   Working Note 1: Calculation of Interest on Drawings

   Munna withdrew ₹50,000 during the year ended 31st March, 2025. The question does not specify the date(s) of withdrawal, so we apply the average period method: interest is calculated for an average period of 6 months (half the year).

   $\text{Interest on Drawings} = \text{Drawings} \times \frac{\text{Rate}}{100} \times \frac{\text{Time (months)}}{12}$

   $= 50{,}000 \times \frac{6}{100} \times \frac{6}{12} = 50{,}000 \times 0.06 \times 0.5 = ₹1{,}500$

   ---

   Journal Entry for Charging Interest on Munna's Drawings

   | Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …

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6. CBSE 2026Set MARCH1 markMCQ
   Q.The capital proportion of A, B and C is 1:2:3 respectively. The divisible profit is ₹ 1,20,000. What will be the amount of profit of C?

   (a) 60,000

   (b) 40,000

   (c) 20,000

   (d) 50,000

   ›Reveal solutionSolution

   C's share of the 1,20,000 divisible profit in the 1 : 2 : 3 ratio is 60,000, so the answer is (a).

   Total of the ratio = 1 + 2 + 3 = 6 parts.

   Partner	Ratio	Share of 1,20,000
   A	1/6	20,000
   B	2/6	40,000

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7. CBSE 2026Set ANNUAL1 markMCQ
   Q.Interest on capital in the absence of partnership deed :

   (a) 6%

   (b) 10%

   (c) 12%

   (d) is not paid

   ›Reveal solutionSolution

   Correct option: (d) is not paid.

   When there is no partnership deed, the Indian Partnership Act, 1932 applies and it allows no interest on partners' capital. Interest on capital is payable only if the deed expressly provides fo …

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8. CBSE 2025Set 67/4/11 markMCQ
   Q.Emily, Flora and Ginni entered into a partnership on 1st October, 2023 with capitals of ₹ 10,00,000 each. The partnership deed provided for interest on capital at 10% p.a. The firm earned a net profit of ₹ 7,50,000 for the year ended 31st March, 2024. The amount of profit transferred to Emily's capital account was : (A) ₹ 2,00,000 (B) ₹ 1,50,000 (C) ₹ 6,00,000 (D) ₹ 2,50,000

   ›Reveal solutionSolution

   The firm earned a net profit of ₹7,50,000. After providing for interest on capital for 6 months (₹50,000 per partner), the remaining distributable profit of ₹6,00,000 is shared equally among the three partners, resulting in ₹2,00,000 being transferred to Emily's Capital Account as her share of profit.

   In partnership accounting, the distribution of profits among partners is governed by the Partnership Deed. This deed outlines various terms such as interest on capital, partners' salaries, commission, and the profit-sharing ratio. If the deed is silent on any matter, the provisions of the Indian Partnership Act, 1932 apply.

   Concept and Accounting Treatment

   1. Interest on Capital: This is an appropriation of profit, not a charge against profit. This means it is allowed only if the partnership deed provides for it and only if the firm earns sufficient profits. It is calculated on the capital employed by each partner for the period it was used in the business. In the Profit and Loss Appropriation Account, interest on capital is debited because it reduces the profit available for distribution among partners. Correspondingly, each partner's capital account is credited, increasing their capital balance.

      Watch out

      A common mistake is to calculate interest on capital for a full year (12 months) without considering the actual period the capital was in the business. Here, the partnership started on 1st October, 2023, and the financial year ends on 31st March, 2024. Therefore, interest must be calculated only for 6 months.

   2. Profit Sharing Ratio: The question does not specify a profit-sharing ratio. According to the Indian Partnership Act, 1932, if the partnership deed is silent on the profit-sharing ratio, profits and losses are to be shared equally among the partners.

      Tip

      Always check the partnership deed for the profit-sharing ratio. If it's missing, remember the default rule: equal sharing.

   3. Profit and Loss Appropriation Account: This account is an extension of the Profit and Loss Account. Its purpose is to show how the net profit (as determined by the Profit and Loss Account) is distributed among the partners. All appropriations of profit, such as interest on capital, partners' salaries, commission, and the final share of profit, are recorded here. The net profit from the Profit and Loss Account is credited to this account, and all appropriations are debited. The balance remaining after all appropriations represents the distributable profit, which is then transferred to the partners' capital accounts in their profit-sharing ratio.

   Working Notes

   1. Calculation of Interest on Capital for each partner:

      • Partnership commenced: 1st October, 2023

      • Financial year end: 31st March, 2024

      • Period for interest calculation: 6 months (October 2023 to March 2024)

      • Capital of each partner: ₹10,00,000

      • Rate of Interest on Capital: 10% p.a.

      • Interest on Capital for Emily = ₹10,00,000 $\times$ $\frac{10}{100}$ $\times$ $\frac{6}{12}$ = ₹50,000

      • Interest on Capital for Flora = ₹10,00,000 $\times$ $\frac{10}{100}$ $\times$ $\frac{6}{12}$ = ₹50,000

      • Interest on Capital for Ginni = ₹10,00,000 $\times$ $\frac{10}{100}$ $\times$ $\frac{6}{12}$ = ₹50,000

      • Total Interest on Capital = ₹50,000 + ₹50,000 + ₹50,000 = ₹1,50,000

   2. Calculation of Distributable Profit:

      • Net Profit for the year = ₹7,50,000
      • Less: Total Interest on Capital (as per Working Note 1) = ₹1,50,000
      • Distributable Profit = ₹7,50,000 - ₹1,50,000 = ₹6,00,000

   3. Profit Sharing Ratio:

      • Since the partnership deed is silent on the profit-sharing ratio, profits are shared equally among the partners.
      • Number of partners = 3 (Emily, Flora, Ginni)
      • Profit Sharing Ratio = 1:1:1

   4. Calculation of each partner's share of Distributable Profit:

      • Emily's Share = ₹6,00,000 $\times$ $\frac{1}{3}$ = ₹2,00,000
      • Flora's Share = ₹6,00,000 $\times$ $\frac{1}{3}$ = ₹2,00,000
      • Ginni's Share = ₹6,00,000 $\times$ $\frac{1}{3}$ = ₹2,00,000

   Solution

   First, we will pass the necessary journal entries to record the appropriation of profit.

   Journal Entries

   Date	Particulars	L.F.	Debit (₹)	Credit (₹)
   2024 Mar 31	Profit & Loss A/c		7,50,000
   	To Profit & Loss Appropriation A/c			7,50,000
   	(Being net profit transferred to P&L Appropriation A/c)
   2024 Mar 31	Profit & Loss Appropriation A/c		1,50,000
   	To Emily's Capital A/c			50,000
   	To Flora's Capital A/c			50,000

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9. CBSE 2025Set 67/4/11 markMCQ
   Q.Assertion (A) : Partners' salary is debited to Profit and Loss Appropriation Account and not to Profit and Loss Account. Reason (R) : Partners' salary is an appropriation of profit, it is not a charge against profits. Choose the correct option from the following : (A) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A). (B) Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A). (C) Assertion (A) is correct, but Reason (R) is incorrect. (D) Both Assertion (A) and Reason (R) are incorrect.

   ›Reveal solutionSolution

   Option (A) is correct: both the assertion and reason are true, and the reason correctly explains why partners' salary goes to the Appropriation Account.

   Concept: Appropriation vs. Charge Against Profits

   The distinction between an appropriation and a charge is fundamental to partnership accounting and determines which account receives the debit entry.

   A charge against profits is an expense incurred in earning the profit—rent, salaries to employees, interest on loans, depreciation. These are debited to the Profit and Loss Account (the main P&L) because they reduce profit before it is available for distribution. They are business expenses.

   An appropriation of profit is a distribution of profit after it has been earned. Once the Profit and Loss Account has determined the net profit, that profit belongs to the partners and must be divided according to the partnership deed. Partners' salary, interest on capital, and the final profit-sharing are all ways of dividing this already-earned profit. These are debited to the Profit and Loss Appropriation Account, a separate account that sits below the main P&L.

   Why Partners' Salary is an Appropriation

   A partner is not an employee. When a partnership deed provides for "salary" to a partner, it is not payment for services rendered as an outsider would receive. Instead, it is a method of profit distribution—a way to compensate a partner who contributes more time or managerial effort before the remaining profit is split in the profit-sharing ratio.

   The Indian Partnership Act, 1932 (Section 13) makes this clear: in the absence of an agreement to the contrary, no partner is entitled to remuneration for acting in the partnership business. Any salary paid is therefore by agreement, and it comes out of the profit, not as a cost to earn the profit.

   Watch out

   A common error is to treat partners' salary like employee salary and debit it to the Profit and Loss Account. This inflates expenses and understates the true profit available for appropriation. The correct treatment is to first close the net profit from P&L Account into the Appropriation Account, then debit partners' salary (and interest on capital, etc.) to the Appropriation Account.

   Accounting Treatment

   The entry for partners' salary is:

   Date	Particulars	L.F.	Debit (₹)	Credit (₹)
   	Profit and Loss Appropriation A/c Dr.		×××
   	To Partner's Capital / Current A/c			×××
   	(Being salary due to partner as per deed)

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10. CBSE 2025Set 67/5/11 markMCQ
    Q.Sun and Moon were partners in a firm sharing profits and losses equally. Their fixed capitals were ₹ 5,00,000 each. After the accounts for the year ended 31st March, 2024 were prepared, it was discovered that interest on capital @ 10% p.a. was not credited to the partners’ current accounts as provided in the partnership deed. The rectifying adjustment entry for the same will be : (A) No Entry (B) Sun’s Current A/c Dr. 50,000 | To Moon’s Current A/c 50,000 (C) Moon’s Current A/c Dr. 50,000 | To Sun’s Current A/c 50,000 (D) Sun’s Current A/c Dr. 50,000 ; Moon’s Current A/c Dr. 50,000 | To Profit and Loss Appropriation A/c 1,00,000

    ›Reveal solutionSolution

    No rectifying entry is needed — the correct answer is (A) No Entry. Sun and Moon share profits equally and have equal fixed capitals, so each partner's omitted interest on capital (₹50,000) is exactly offset by the extra ₹50,000 profit each wrongly received when the whole profit was distributed without providing interest.

    Concept: Rectification of an Omitted Appropriation

    Interest on capital is an appropriation of profit. When it is omitted, the profit that should first have been set aside as interest is instead distributed among the partners in their profit-sharing ratio. To rectify, we compare what each partner actually received with what each should have received, and pass a single adjusting entry only for the net difference.

    A key rule: when all partners have equal capitals and share profits in the same ratio (here both are equal), the interest each should receive equals the extra profit each received, so every partner's net difference is nil — and no entry is required.

    Working Notes

    W.N.1 — Interest on capital that was omitted

    Partner	Fixed Capital (₹)	Rate	Interest (₹)
    Sun	5,00,000	10%	50,000
    Moon	5,00,000	10%	50,000
    Total			1,00,000

    W.N.2 — Right vs. wrong distribution (let the year's profit be P)

    | Partner | Should receive: Interest + share of (P − 1,00,000) | Actually received: share of P | Net difference |

    |---|---|---|---| …

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11. CBSE 2025Set 67/5/11 markMCQ
    Q.Manoj, Dilip and Rajinder were partners in a firm sharing profits and losses in the ratio of 7 : 3 : 5. Their fixed capitals were ₹ 10,00,000, ₹ 8,00,000 and ₹ 6,00,000, respectively. The partnership deed provided for interest on partners’ drawings @ 12% p.a. Which of the following accounts will be debited for charging interest on partners’ drawings ? (A) Partners’ Capital Account (B) Profit and Loss Appropriation Account (C) Interest on Drawings Account (D) Profit and Loss Account

    ›Reveal solutionSolution

    Interest on drawings is charged to the partner, so the account debited is the Partners' Capital Account — option (A). The Interest on Drawings Account is credited and later transferred to the credit of the Profit and Loss Appropriation Account.

    Concept: How Interest on Drawings Is Recorded

    When a partner withdraws money from the firm for personal use, the firm charges interest on those drawings as compensation for the loss of use of funds. This interest is an income for the firm and an amount due from the partner. Because it is recovered from the partner, the partner's account must be debited.

    The two-step treatment is:

    1. Charge the interest to the partner

    Particulars	L.F.	Debit (₹)	Credit (₹)
    Partners' Capital A/c Dr.		(interest)
    To Interest on Drawings A/c			(interest)

    2. Transfer the interest to the appropriation account

    Particulars	L.F.	Debit (₹)	Credit (₹)
    Interest on Drawings A/c Dr.		(interest)
    To Profit and Loss Appropriation A/c			(interest)

    Evaluating the Options

    • (A) Partners' Capital Account — Correct. The partner owes the firm, so the capital (or current) account is debited when the interest is charged.
    • (B) Profit and Loss Appropriation Account — Wrong. This account is credited with interest on drawings, not debited. …

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12. CBSE 2025Set 67/6/11 markMCQ
    Q.(a) Mohan, a partner, withdrew ₹ 80,000 from the business for his personal use during the year ended 31st March, 2024. Interest on drawings was to be charged @ 12% per annum. Interest on Mohan's drawings will be : (A) ₹ 9,600 (B) ₹ 4,800 (C) ₹ 800 (D) ₹ 1,600

    (OR)

    (b) The following account is debited for allowing interest on partners' capital : (A) Profit and Loss Account (B) Partners' Current Account (C) Interest on Capital Account (D) Partners' Capital Account

    ›Reveal solutionSolution

    Part (a): Interest on drawings (6-month average) = 80,000 × 12% × 6/12 = ₹4,800 (B).

    Part (b): The account debited for allowing interest on capital is the Interest on Capital Account (C).

    Part (a)

    When only the total drawings and no dates are given, interest is charged for the average period of 6 months (a lump sum could have been withdrawn any time in the year).

    Interest = 80,000 × 12/100 × 6/12 = 80,000 × 0.06 = ₹4,800 …

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