alleryStart learning →Interest on a loan advanced by a partner is closed by transferring it to the:
AProfit and loss appropriation account
BPartner's own capital account directly
CProfit and loss account of the firm
DBalance sheet as a separate liability
Answer & Solution
Correct answer: C. Profit and loss account of the firm
1. Interest on a partner's loan is an expense of the firm rather than a division of its profit.
2. The textbook calls it a charge against profit, meaning it must be provided whether the firm earns a profit or suffers a loss.
3. It is therefore transferred to the profit and loss account, not the appropriation account.
4. Interest on capital, partners' salary and commission are appropriations instead, and are allowed only out of profit.
5. Note also that the interest is credited to the partner's loan account, not to the capital or current account.
_Source: TN HSC Class 12 Accountancy (Samacheer Kalvi, Govt of Tamil Nadu), Unit 3 "Accounts of Partnership Firms - Fundamentals", §3.9_
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