26 July 2016
Ay 2016-17: ======== It is a partnership firm. Remuneration and Interest on capital both can be debited to P&L Account. As regards interest on capital, interest on capital upto 12% is allowed. Please let me how to calculate interest on capital.
On opening balance of the capital of the firm ? or on closing balance of the capital of the firm ?
If on closing balance of the capital of the firm, shall it be worked out before adding nett profit and remuneration.
26 July 2016
01. The payent of interest should be authorised by the deed of partnership 02. In most of the cases, the method of calculation of interest is also specified in the said deed. 03. In the absence of that, one can follow the method as is used by our Banking industry.....monthly product basis The practice should be followed year on year basis.....every year one can NOT change the same.....(I know some firms that calculate interest on closing balance...even some calculate on opening balance)
26 July 2016
Thank you Mr Amol. and thanks for prompt guideline. No doubt you are having tremendous experience. In so many earlier years after giving the effect of share of profit and remuneration I used to do as follows:
PARTNERS' CAPITAL ACCOUNT: ========================= After giving the credit of the share of profit and remuneration to the partner's capital account, closing balance of the partners' capital as on 31st March (Cr)......... Share of profit as on 31st March (Dr)............ Remuneration as on 31st March (Dr)................ Balance as on 31st March (Cr) Say Rs. 1,00,000
Now I will credit the partner's capital by the interest on capital of Rs 1,00,000/- [ Intt Rate 1% to 12% is allowed ]
26 July 2016
That is also not wrong at all, since you are following it on a continuous basis......but as i said the current trend is to give interest on monthly balance...as is calculated by Banking industry.
26 July 2016
Another way is as follows: ================== Workout the share of profit of the partner out of the book profit of the firm and remuneration in P&L sharing % and now before giving the credit effect of share of book profit and remuneration in P&L sharing % give a credit effect of interest on capital to the partner's capital account and later credit the book profit and remuneration. Any way both the ways are one the same. Am I right sir ? I always appreciate your best guideines.
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