Meaning of Loan by partner to firm
Meaning - Each partner contributes Capital to the firm. If a partner gives money to the firm over and above his capital contribution then such amount is treated as a loan by partner to firm.
Is it a Liability for firm - Yes this is a liability for the firm. It will be shown on liabilities side of balance sheet of the firm till it is repaid. Since this is a liability so it has a credit 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 paid @ 6% per annum
Nature - Such interest is a charge against profits and is payable whether firm earns profits or incurs losses.
Journal Entries for Interest on (Loan by partner to firm)
- When Loan is taken from partner
- Bank A/c Dr..
- To Loan by Partner A/c
- Allowing interest
- Interest on (loan by partner) A/c Dr..
- To Loan by partner A/c
- Payment of Interest
- Loan by partner A/c Dr..
- To Cash/Bank A/c
- Closing entry
- Profit and Loss A/c Dr..
- To Interest on (Loan by partner) A/c
- Repayment of Loan
- Loan by Partner A/c Dr..
- To Cash/Bank 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 paid @ 6% per annum
Amount - Interest is calculated on the amount unpaid
Period - it is calculated for the period for which the money is used by the firm. Example - Suppose , partner gave loan to firm on 01-Aug-20XX of Rs 5 Lakhs. Interest rate agreed is 6% per annum. Now interest inn 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)