Partnership Fundamentals - Class 12th

Introduction

• New chapter: Partnership Fundamentals
• Previous lecture: Basic introduction
• Today’s focus: Two important topics in Accounting

Topics Covered

1. Charge Against Profit vs. Appropriation of Profit
2. Interest on Loan by Partner to the Firm & Interest on Loan by the Firm to the Partner

Charge Against Profit

• Terminology from Class 11th: Expense
• In Class 12th, called Charge Against Profit
• Nature: Paid regardless of profit or loss
  • Always paid (e.g., depreciation)
• Treatment: Debited to Profit and Loss Account
• Examples:
  • Rent Paid to Partner
  • Interest on Loan by Partner

Appropriation of Profit

• Distribution of net profit among partners
• Nature: Only occurs when there is profit
• Treatment: Credited to partners’ accounts

Comparison

• Charge Against Profit: Expense, debited to P&L, paid regardless of profit or loss
• Appropriation of Profit: Distribution of profit among partners, only done if there’s profit

Examples

• Rent Paid to Partner:
  • Firm uses property owned by a partner
  • Rent is an expense, classified as Charge Against Profit
• Interest on Loan by Partner:
  • Firm takes loan from a partner
  • Interest is an expense, classified as Charge Against Profit

Interest on Loan by the Firm to the Partner

• Interest earned when a partner takes a loan from the firm
• Nature: Income to the firm
• Treatment: Credited to Profit and Loss Account
• Provisions: If silent partnership deed, no interest

Accounting Entries

• Interest on Loan by Partner to Firm:

  1. Interest on Loan by Partner A/c Dr. To Loan by Partner A/c
  2. P&L A/c Dr. To Interest on Loan by Partner A/c

• Interest on Loan by Firm to Partner:

  1. Partner’s Capital/Current A/c Dr. To Interest on Loan A/c
  2. Interest on Loan A/c Dr. To P&L A/c

Example Calculations

• Akhil & Bharat, partners
  • Capital: ₹2 lakh
  • Loans: ₹4 lakh (Akhil), ₹2 lakh (Bharat)
  • No agreement on interest
  • Law: 6% p.a. interest if no deed
• Cases:
  • Case 1: Profit before interest ₹25,000
    • Profit after interest: ₹7,000
  • Case 2: Profit before interest ₹15,000
    • Loss after interest: ₹(3,000)
  • Case 3: Loss before interest ₹25,000
    • Loss after interest: ₹(43,000)

Homework/Quiz

• If the partnership deed is silent:
  • How much interest does the firm pay and receive on loans?
  • Comment answers below.

Next Steps

• Continue with further accounting treatments
• Detailed examples and exercises in next lecture