A partnership firm earned a net profit of ₹5,00,000 for the year. Before distributing the profit among partners, it paid the following amounts:
- ₹20,000 as manager’s commission
- ₹30,000 as rent to a partner
- ₹40,000 as interest on a loan taken from a bank
- ₹50,000 as interest on a partner’s capital
Which of the above payments is not a charge against profit?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Interest on Partner's Capital.
Interest on Partner's Capital is an appropriation of profit. It is debited to profit and loss appropriation account and credited to partner's capital account.
OTHER OPTIONS
- Manager's Commission of ₹20,000 is a charge against profit because it is an expense incurred in the course of running the business. It is debited to profit and loss A/c.
- Rent to partner of ₹30,000 is also a charge against profit, as it is an expense paid to the partner for using their property for the business. It is debited to profit and loss A/c.
- Interest on Loan of ₹40,000 is a charge against profit as it represents an expense for borrowing funds. It is debited to profit and loss A/c.