Ma'am loan given to a partner will be drawings or not ?
Dear Student
Loan given to a partner in a partnership firm is completely different from that of his drawings. In order to understand this, we need to understand the basic difference between the two:
Drawings : Drawing refers to any cash or value of goods withdrawn by the owner/partner for personal use.
Loan : Loan includes a thing or amount of money which is borrowed for a period of time with the and to be paid back (with interest).
Loan given to a partner is treated just like a normal loan given to any third party with a proper agreement which includes the rate of interest, the duration of the loan, terms and conditions, etc. Moreover, a separate loan account is opened in the ledger to treat such loan to the partner and is shown on the Asset side of the Balance Sheet. Interest on Partner's loan is shown on the credit side of Profit and Loss Account.
Drawing on the other hand are the amounts withdrawn by the the partners either out of the capital or out of profits in the normal course of business. Drawings are shown as the reduction in the capital of the partners (debit side of Capital account of the partner). There is no proper agreement of loan as there in the case of loan to a partner. Interest on drawings is shown on the credit side of Profit and Loss Appropriation Account.
Hence, Drawings by a partner has its own existence in the term of legality, effect on capital, agreements, etc as compared to the loan to a partner.
Regards
Loan given to a partner in a partnership firm is completely different from that of his drawings. In order to understand this, we need to understand the basic difference between the two:
Drawings : Drawing refers to any cash or value of goods withdrawn by the owner/partner for personal use.
Loan : Loan includes a thing or amount of money which is borrowed for a period of time with the and to be paid back (with interest).
Loan given to a partner is treated just like a normal loan given to any third party with a proper agreement which includes the rate of interest, the duration of the loan, terms and conditions, etc. Moreover, a separate loan account is opened in the ledger to treat such loan to the partner and is shown on the Asset side of the Balance Sheet. Interest on Partner's loan is shown on the credit side of Profit and Loss Account.
Drawing on the other hand are the amounts withdrawn by the the partners either out of the capital or out of profits in the normal course of business. Drawings are shown as the reduction in the capital of the partners (debit side of Capital account of the partner). There is no proper agreement of loan as there in the case of loan to a partner. Interest on drawings is shown on the credit side of Profit and Loss Appropriation Account.
Hence, Drawings by a partner has its own existence in the term of legality, effect on capital, agreements, etc as compared to the loan to a partner.
Regards