TRANSACTIONS OF CHARGE AGAINST PROFIT

ACCOUNTING FOR PARTNERSHIP FIRMS

LESSON - 3

TRANSACTIONS RELATED TO CHARGE AGAINST PROFIT

         IMPORTANT TRANSACTIONS RELATED TO CHARGE AGAINST PROFIT

1) Interest on partner's loan

2) Rent to a partner

3) Paid salary to a partner as a manager, etc.

            These are the major transactions to be considered while preparing a profit and loss account. This may confuse as it looks like settlements related to partner's appropriations but in real it is not so. Here the partner is to be considered as a third party for the business, as he is providing either his money as loan or an accommodation on rent, in both these cases the partner is a liability for the firm. So the transactions of similar nature should be considered as a charge against profit not as an appropriation of profit.

1) INTEREST ON PARTNER'S LOAN

            When a partner advances (gives) money for the firm's operation then it is called as a partner's

loan. The partner is not investing his money as a capital but lending it to the firm as a loan so the partner is entitled to receive interest on the loan money. Partners loans interest is a charge against profit, so so it has to be debited to the profit and loss account.The percentage of interest will be agreed by the partners in their deed in advance, if in case they have no deed then INDIAN PARTNERSHIP ACT 1932 will apply. According to the ACT the partner is entitled to receive an annual interest of 6% on the loan advanced by him.

            JOURNAL ENTRIES

 

        1) Interest on partners loan a/c             Dr.        XXX

                To partners loan a/c                                                XXX

            (being interest charged)

        2) Profit and loss a/c                             Dr.        XXX

                To interest on partners loan a/c                                XXX

            (being interest on loan transferred to P&L a/c)

2) RENT PAID TO A PARTNER

            Partner may provide his property for the purpose of business use so in that case he is entitled to charge rent for his premises. The rent money paid to the partner is not as a partner but as a third person, so the firm has to consider this transaction as a charge against profit, so it has to be debited to the profit and loss account.

            JOURNAL ENTRIES

                1) Rent payable a/c                              Dr.        XXX

                        To partners capital/current a/c                                XXX

                (being rent paid to a partner)

                2) Profit and loss a/c                            Dr.        XXX

                        To rent payable a/c                                                    XXX

                (being rent paid transferred to P&L a/c)

3) PAID SALARY/COMMISSION TO A PARTNER AS A MANAGER

            When the partner is appointed as a manager of the firm to take care of its operations then apart from his share as a partner he is also entitled to receive a salary/commission as a manager for the work done by him. These transactions are also considered as a charge against profit by the firm, so it has to be debited to the profit and loss account.

            JOURNAL ENTRIES

                1)Partners salary/commission a/c                     Dr.                    XXX

                        To partner's capital/current a/c                                                                XXX

                (being partner's salary/commission paid)

                2) Profit and loss a/c                                         Dr.                    XXX

                        To partners salary/commission a/c                                                        XXX

                (being partner's salary/commission paid transferred to profit and loss a/c)