Meaning of Loan by firm to partner
Meaning - If a partner borrows some amount from the firm for his personal expenses then such amount is treated as loan by firm to partner.
Is it an Asset for firm - Yes this is an asset for the firm. It will be shown on assets side of balance sheet of the firm till it is repaid. Since this is a asset so it has a debit balance.
Interest Rate - If there is an agreement to this effect then interest is paid as per agreement. In the absence of an agreement interest is not payable
Nature - Such interest is a charge against profits and partner has to pay interest to the firm if there is agreement to this effect
Journal Entries for Interest on (Loan by firm to partner)
- When Loan is given to partner
- Loan to Partner A/c Dr..
- To Cash/Bank A/c
- For charging interest on Loan
- Partner Capital/Current A/c Dr..
- To Interest on Loan to Partner (Increase in income is credited)
- When Interest on loan is received
- Cash/Bank A/c Dr..
- To Partner Capital/Current A/c
- Closing Entry
- Interest on Loan to Partner A/c Dr..
- To Profit and Loss A/c
Calculation of Interest
Interest Rate - If there is an agreement to this effect then interest is paid as per agreement. In the absence of an agreement interest is not payable
Amount - Interest is calculated on the amount unpaid
Period - it is calculated for the period for which the money is used by the partner. Example - Suppose , firm gave loan to partner on 01-Aug-20XX of Rs 5 Lakhs. Interest rate agreed is 6% per annum. Now interest in such case will be calculated for 8 months (Aug to Mar). 500000 X 6/100 X 8/12) = Rs 20000.
From next year onwards the interest will be calculated for full year till the year when it is repaid (In the year of repayment again it will be calculated for proportionate period)