How to pass the entry

Under fixed capital method interest on capital is 

Asked by raju_salgaonkar | 19th Jan, 2020, 08:20: PM

Expert Answer:

Important provisions relating to Interest on Capital:
  • If there is no Partnership Deed or there is no clause in the deed as to interest on capital: Interest on Capital is not allowed.
  • If the Partnership Deed provides for interest on capital but is silent as to the treatment of interest as a charge or appropriation: Interest on capital is treated as appropriation of profit. Such interest is payable only if the firm is making profits. Following are possible situations:

 

  1. In case of loss: No interest is allowed. 
  2. In case of profit, where profit before interest is equal to or more than the interest: Interest is allowed at the agreed rate. 
  3. In case of profit, where profit before interest is less than the interest: Interest is allowed only to the extent of profit in the ratio of interest on capital of each partner.
  • If the Partnership Deed provides for interest as a charge (i.e., to be allowed whether there are profits or loss): Interest on capital is allowed whether there is profit or loss.

 

 
Journal Entries for recording Interest on Capital:
 
In case of Fixed Capital Accounts:
 Interest on Capital A/c                     …Dr.

    To Partners’ Current A/cs

(Being the interest on capital allowed to partners)

Profit and Loss Appropriation A/c    …Dr.

     To Interest on Capital A/cs

(Being the interest on capital transferred to Profit and Loss Appropriation Account)

Alternatively: only one entry can be passed in place of above 2 entries as follows:

      Profit and Loss Appropriation A/c        …Dr.

             To Partners’ Current A/c

     (Being the interest on capital allowed to partners)

Answered by Surabhi Gawade | 20th Jan, 2020, 10:52: AM

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