Show the treatment of interest on loan in the profit and loss appropriation account and profit and loss account????
Would interset on capital and interest on loan would be having the same treatment in profit and loss appropriation account????
What will be the journal entry to it?????????and Explain it????with proper example??????
Interest on loan is the amount of interest that is paid by the firm on the amount of loan taken from a partner. It is shown on the debit side of the Profit and Loss Account. In case, if interest on loan is not adjusted in the Profit and Loss Account then it will be adjusted through Profit and Loss Appropriation Account. In this account, interest on loan is shown as a deduction form the net profit on the credit side. That is, only after deducting the interest on loan, the remaining profits will considered for appropriation among the partners. This topic has been extensively covered in the Lesson 6 of Chapter 1 of Book 1 in our study material.
However, the treatment of interest on loan and interest on capital is not same in the Profit and Loss Appropriation Account. Interest on capital is shown on the debit side of the Profit and Loss Appropriation Account as a appropriation of profits whereas interest on loan is deducted from the net profit on the credit side of this account. The following are the Journal entries for Interest on Capital and Interest on Loan are given below.
Interest on Capital
For Crediting Interest on Capital
Interest on Capital A/c
To Partners’ Capital/Current A/c
For transferring Interest on Capital to Profit and Loss Appropriation A/c
Profit and Loss Appropriation A/c
To Interest on Capital A/c
Interest on Loan
For providing Interest on Loan from Profit and Loss A/c
Profit and Loss A/c
To Interest on Loan A/c
To enhance your understanding on these topics, you can go through the following lessons of our study material.
- Lesson 4 of Chapter 1 (Book 1)
- Lesson 6 of Chapter 1 (Book 1)