alleryStart learning →Interest on capital is allowed to partners:
AEven when the firm has made a loss
BOnly when there is profit, and before dividing it
COnly after profits have been fully divided
DAutomatically at six per cent every year
Answer & Solution
Correct answer: B. Only when there is profit, and before dividing it
1. Interest on capital compensates a partner who has contributed more capital than the profit sharing ratio reflects.
2. It is allowed only when the deed provides for it; without a deed no interest on capital is allowed at all.
3. The textbook states that it is allowed only when there is profit, and that it is provided before division of profits among the partners.
4. When the firm incurs a loss, interest on capital is not provided.
5. There is no automatic rate, unlike interest on a partner's loan, which defaults to six per cent.
_Source: TN HSC Class 12 Accountancy (Samacheer Kalvi, Govt of Tamil Nadu), Unit 3 "Accounts of Partnership Firms - Fundamentals", §3.7.1_
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