Which of the following are charges against profits?
(A) Rent paid to partners
(B) Interest on loan, paid to partners
(C) Interest on Capital
(D) Manager's commission
Choose the correct answer from the options given below:
Which of the following are charges against profits?
(A) Rent paid to partners
(B) Interest on loan, paid to partners
(C) Interest on Capital
(D) Manager's commission
Choose the correct answer from the options given below:
Solution
Charges against profits are expenses debited to the Profit and Loss Account before arriving at net profit. Appropriations of profits are distributions made after calculating net profit, debited to the Profit and Loss Appropriation Account.
Let's analyze each item:
(A) Rent paid to partners - When a partner allows the firm to use their property, rent paid is a business expense. It is debited to Profit and Loss Account → Charge against profits ✓
(B) Interest on loan, paid to partners - When partners give a loan (separate from capital), interest on such loan is a business expense. It is debited to Profit and Loss Account → Charge against profits ✓
(C) Interest on Capital - This is not an expense but a distribution of profit to partners. It is debited to Profit and Loss Appropriation Account → Appropriation of profits ✗
(D) Manager's commission - Salary or commission paid to a manager (whether partner acting as manager or employee) is a business expense. It is debited to Profit and Loss Account → Charge against profits ✓
The key distinction is: Interest on capital is a reward for investing capital in the business, not payment for any service or facility provided. Hence it's an appropriation, not a charge.
Items (A), (B) and (D) are charges against profits.
Answer: Option 1
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2022: 23 Aug Shift 2