Identify the true statement in respect of a partnership Firm-
Identify the true statement in respect of a partnership Firm-
Solution
Charge vs Appropriation is the key concept here.
A charge is an expense that reduces profit and is accounted for before arriving at net profit. It is debited to the Profit & Loss Account.
An appropriation is a distribution of profit after it has been calculated. It is shown in the Profit & Loss Appropriation Account.
Rent paid to a partner:
When a partner allows the firm to use their personal property (like a building), rent is paid for its use. This is a genuine business expense incurred to earn revenue. It is treated as a charge against profits, similar to rent paid to any outsider.
Journal Entry:
Rent A/c Dr
To Partner's Current A/c (or Cash)
Interest on loan from partner:
When a partner advances a loan to the firm (over and above their capital contribution), interest paid on this loan is a business expense. This loan is different from capital, and the partner is acting as a creditor. Interest on such loan is a charge against profits.
Journal Entry:
Interest on Loan A/c Dr
To Partner's Loan A/c
Both are recorded in the Profit & Loss Account (not Appropriation Account) as expenses before calculating net profit.
This is different from interest on capital or partner's salary, which are appropriations of profit shown in the Profit & Loss Appropriation Account.
Option 2 correctly states that both are charges for the firm.
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