Loan by Firm to Partner
A Complete Guide to Accounting Treatment & Journal Entries
Loan by Firm to Partner - Overview
Nature
Asset for the firm
Accounting
Debit balance on asset side
Interest
Income for the firm, expense for partner
Journal Entries
Specific entries for loan transactions
Loan Flow Diagram
This diagram illustrates the flow of loan and interest between a firm and its partner:
Firm (Lender)
Provides loan to the partner
Receives interest from the partner
Partner (Borrower)
Receives loan from the firm
Pays interest to the firm
Understanding Loan by Firm to Partner
When a partnership firm has surplus funds, it may provide a loan to one of its partners.
Key Concept: The loan represents an asset for the firm, as it is an amount receivable from the partner. Unlike partner's capital which represents ownership, a loan to a partner is a recoverable amount that bears interest as per agreed terms.
Accounting Perspective: From the firm's viewpoint, the loan given to a partner is recorded as an asset. Interest received on this loan is treated as income, increasing the firm's profit.
Key Points of Loan by Firm to Partner
Important Note: We are making the accounts of the firm, so we will always think from the angle of the firm.
| Aspect | Details |
|---|---|
| Loan by | Firm to Partner |
| Who gave loan | Firm |
| Who received loan | Partner |
| Interest paid by | Partner |
| Interest received by | Firm |
| For firm, interest is | Income |
| For firm, loan is | Asset |
| Firm shows in Balance Sheet | Assets side |
| For firm, the balance is | Debit |
Journal Entries for Loan Transactions
Important: If interest is payable more than once during the year then make interest entry more than once. But the transfer to P&L entry is always made only once at the end of the year.
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| Sr. | Transaction | Journal Entry | Account Type | Effect |
|---|---|---|---|---|
| 1 | Loan given by firm to partner |
Loan to Partner A/c Dr. To Cash/Bank A/c |
Asset to Asset | Asset ↑ (Debit) Asset ↓ (Credit) |
| 2 | Loan repaid to firm |
Cash/Bank A/c Dr. To Loan to Partner A/c |
Asset to Asset | Asset ↑ (Debit) Asset ↓ (Credit) |
| 3 | Interest due from partner |
Partner's Capital A/c Dr. To Interest on Loan to Partner A/c |
Capital to Income | Capital ↓ (Debit) Income ↑ (Credit) |
| 4 | Interest received by firm |
Cash/Bank A/c Dr. To Partner's Capital A/c |
Asset to Capital | Asset ↑ (Debit) Capital ↑ (Credit) |
| 5 | Closing Entry (year end) |
Interest on Loan to Partner A/c Dr. To Profit and Loss A/c |
Income to Nominal | Transfer to P&L |
Calculation of Interest Example
Scenario:
ABC Partnership Firm gave loan to Partner Ramesh of Rs 20,000
Date of giving loan: 1-Oct-24
Date of returning the loan: 31-Mar-25
Interest rate agreed: 12% per annum
Calculation: Since Ramesh has used money for 6 months, so interest will be received for 6 months only.
Interest = Principal × Rate × Time
Interest = 20,000 × 12/100 × 6/12
Interest = 20,000 × 0.12 × 0.5
Interest = Rs 1,200
Alternative daily calculation: For 184 days at 12% p.a.
Interest = 20,000 × 12/100 × 184/365
Interest = 20,000 × 0.12 × 0.5041
Interest = Rs 1,209.84 (approx)
Comparison: Loan by Partner to Firm vs Loan by Firm to Partner
| Aspect | Loan by Partner to Firm | Loan by Firm to Partner |
|---|---|---|
| Lender | Partner | Firm |
| Borrower | Firm | Partner |
| For Firm (Nature) | Liability | Asset |
| Balance Sheet Side | Liability side | Asset side |
| Balance Type | Credit balance | Debit balance |
| Interest for Firm | Expense | Income |
| Interest Payment | Firm pays interest | Firm receives interest |
| Journal Entry (When Loan Given) | Cash/Bank A/c Dr. To Loan from Partner A/c |
Loan to Partner A/c Dr. To Cash/Bank A/c |
Frequently Asked Questions (FAQs)
A firm may give a loan to a partner for various reasons: when the partner needs funds for personal reasons, when the firm has surplus cash, or as part of the partnership agreement. It allows the partner to access funds while ensuring the firm earns interest on its idle cash.
Unless specifically stated otherwise in the partnership agreement, a firm is entitled to charge interest on loans given to partners. The interest rate is usually agreed upon in advance and documented in the loan agreement.
"Loan to Partner" appears on the asset side of the firm's balance sheet, typically under "Current Assets" if repayable within one year, or under "Non-Current Assets" if repayable after more than one year.
Partner's drawings are withdrawals from the partner's capital account for personal use and reduce the partner's capital. Loan to partner is a separate transaction where the firm lends money to the partner, which must be repaid with interest. Drawings don't bear interest and aren't separately recorded as assets.
If a partner defaults on loan repayment, the firm can adjust the outstanding amount against the partner's capital account or current account. Legal remedies may also be pursued as per the loan agreement. The defaulted amount becomes a bad debt for the firm.
Test Your Knowledge - MCQ Quiz
Question 1: When a firm gives a loan to a partner, for the firm it is:
Correct Answer: An asset. The loan represents money receivable by the firm from the partner, making it an asset for the firm.
Question 2: Interest received by the firm on partner's loan is:
Correct Answer: Income for the firm. Interest received increases the firm's profit and is therefore recorded as income.
Question 3: The journal entry for giving loan to a partner is:
Correct Answer: Loan to Partner A/c Dr. To Cash/Bank A/c. This records the increase in loan asset and decrease in cash asset.
Question 4: Where does "Loan to Partner" appear in the firm's balance sheet?
Correct Answer: Asset side. As the firm is owed this money by the partner, it is shown as an asset.
Question 5: How is interest on loan to partner treated in partner's account?
Correct Answer: It decreases partner's capital. When interest is due from a partner, it reduces the partner's capital account as it's a charge against the partner.
int is charged by debiting the partner current or capital account.
may I debit partners loan account instead of current or capital account
I understand you are asking for loan given by firm to partner. So when firm charges interest then it debits either partner capital account or partner current account. This will reduce the balance in capital or current account and so firm gets the interest. No you cannot debit the partner loan account as it will just increase the balance in partner loan account and firm does not get the interest money.