Page 15 - ISCDEBK-12

Partnership Accounts—Fundamentals 1.5

(ii) Ann cannot claim interest on ` 2,50,000 being excess capital contributed. The Indian
Partnership Act, 1932 provides that interest is not to be allowed on capital, if the
Partnership Deed does not exist or allow it.
(iii) The Indian Partnership Act, 1932 provides that interest on drawings is not to be
charged if not so provided for in the Partnership Deed. Therefore, the proposal of
Rose is not justified.
(iv) Ann is justified in claiming interest on the loan advanced by her. Since,
Partnership Deed does not exist, interest on loan by a partner is a charge
against profit and is allowed @ 6% p.a. as is provided for in the Indian Partnership
Act, 1932.
(v) Ann is not right in claiming profits to be shared in their capital ratio. It is so because
the Indian Partnership Act, 1932 provides that profits shall be shared equally in the
absence of agreement on profit-sharing ratio.
Illustration 3 (Partnership Deed does not Exist).
A and B are partners from 1st April, 2017 without a Partnership Deed and they introduced
capital of ` 7,00,000 and ` 4,00,000 respectively. On 1st October, 2017, A advanced loan
of ` 3,75,000 to the firm without an agreement as to interest. B allows the firm to carry
on business from premises owned by him for a yearly rent of ` 1,20,000. Profit as per the
Profit and Loss Account for the year ended 31st March, 2018 was ` 7,97,390 before charging
rent. The partners do not agree on allowing of interest and the basis of division of profits.
You are required to divide the profits giving reasons for your method.

Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2018 Cr.
Particulars ` Particulars `
To Profit transferred to Capital A/cs: By Profit and Loss A/c 6,66,140
A 3,33,070 (After rent and interest on loan)
B 3,33,070 6,66,140 (` 7,97,390 – ` 1,20,000 – ` 11,250)
6,66,140 6,66,140

Reasons:
1. Rent is a charge on profit hence, is to be debited to Profit and Loss Account.
2. Since there is no Partnership Deed, A will be allowed interest @ 6% for six months,
(` 3,75,000 × 6/100 × 6/12 = ` 11,250), because the loan has been advanced on
1st October, 2017. Interest on Partner’s Loan is a charge against profit hence, is to
be debited to Profit and Loss Account.
3. In the absence of Partnership Deed, profit-sharing ratio will be equal.

Illustration 4 (Interest on Capital when Profit is Inadequate).
A and B contribute ` 4,00,000 and ` 2,00,000 respectively as capital on which they agree to
pay interest @ 6% p.a. They are to share profit in the ratio of 2 : 3. Business profit (before
interest) for the year is ` 30,000. Show the relevant account to allocate interest on capitals:
(i) if Partnership Deed is silent about the treatment of interest on capital, and
(ii) if interest is a charge as per Partnership Deed.