Marry and Kayli were two partners sharing profits and losses in the ratio 5 : 7. Kayli was in need of funds, so she took a loan of Rs. 4,00,000 from the firm at an agreed rate of interest being 8% p.a. If Interest is charged on loan from the partner, it will be:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Credited to Profit and Loss A/c
Kayli borrowed from the firm, so the interest she pays is an income of the firm. Income is credited to the Profit and Loss Account, where it is earned before profit is shared; it is not an appropriation of profit.
Interest on a loan that a partner gives to the firm is the opposite case: it is a charge, debited to the Profit and Loss Account. Here the loan runs the other way, so the interest is credited.