Read the following information and answer the questions.
A and B entered into partnership to supply stationery items without any terms and conditions. A contributed ₹1,00,000 as capital while B contributed ₹20,000 only but he allowed his building to be used as the firm office. After running business for nine months, they felt an urgency of funds and the same was fulfilled by B by providing ₹80,000 as loan to the firm. At the end of the accounting year, they made a profit of ₹50,000. They decided to expand their business in future by admitting C into the firm and also to make agreement in writing containing all the terms and conditions.
Select out of the following the item that is a charge against profit.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Interest on partner’s loan
A partner’s loan is a debt of the firm. Interest on it is an expense, a charge against profit: it is debited to the Profit and Loss Account and must be paid whether the firm earns a profit or not. Interest on capital, salary and commission to partners are appropriations of profit, shown in the Profit and Loss Appropriation Account and allowed only out of profit.
Option (1) Interest on partner’s capital — Incorrect. Interest on capital is an appropriation of profit, and here it is not even allowed, as there is no agreement.
Option (2) Partner’s salary — Incorrect. A partner’s salary is an appropriation of profit, allowed only if the partners agree to it.
Option (3) Partner’s commission — Incorrect. Commission to a partner is also an appropriation of profit, not a charge.
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