LOAN NOT USED FOR BUSINESS

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SIJU VARGHESE (Querist)

30 March 2010 Sir,

A Proprietor has taken a loan in the name of his business but that loan has been used to start a Partnership Firm in which he and his friends are Partners. Now the problem is that, his own business has not enough profit to show the interest on such loan. Can/should he show an amount equal to such interest as receipt or receivable from such Partnership Firm?
Is this will come as misappropriation of loan?

The above are only from my view, please suggest me if there is any other solutions.

Waiting for your valuable advises.

Thanking You

CA. BIJENDER KR. BANSAL

CA. BIJENDER KR. BANSAL (Expert)

30 March 2010 As per my view, He can show that loan is induced in partnership firm as his share of capital. He can take interst on partner's capital in firm. and pay interst on such loan from own source.
In such way, there is no miappropriation of loan.
You will received interet on capital as per partnership deed and pay interest self.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)

30 March 2010 As far as the accounting part is concerned, Mr. Bansal's view is correct to a certain extent. But siphoning of fund is misappropriation which may lead to classify the asset as NPA,as far as the banker is concerned,even though the loan is properly serviced which has far reaching consequences as far as the borrower is concerned in the banking sector.

Taranjit Singh

Taranjit Singh (Expert)

30 March 2010 If loan is taken in the name of Proprietorship, then it will appear in books.

CA. BIJENDER KR. BANSAL

CA. BIJENDER KR. BANSAL (Expert)

30 March 2010 Dear all,
If any person takes loan for business in his individual capacity for investment in business, then he can invest it into firm as capital. If he pay instalment in time then what is the objection for bank.
If any other view for this , please tell me also.
Thanks

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)

30 March 2010 Dear Mr Bansal.

I have answered by giving emphasis to the first line of the query which is reproduced below.

"A Proprietor has taken a loan in the name of his business but that loan has been used to start a Partnership Firm in which he and his friends are Partners".

What does a person like me understand from the above?

What I understood is "a proprietor took a loan in the name of his proprietary concern and introduced that money into a partnership firm in which he is a partner. This is in simple terms siphoning of money.

I again considered the the second line of the query which is reproduced below.

"Now the problem is that, his own business has not enough profit to show the interest on such loan".

What does that mean? He is unsuccessful in the business because,among others,fund diversion is a reason.
Bankers may consider this as an unhealthy loan and thus I concluded my answer with the second line of my first reply.

CA. BIJENDER KR. BANSAL

CA. BIJENDER KR. BANSAL (Expert)

30 March 2010 Dear Mr. Warrier

Thanks for valuable suggestion

SIJU VARGHESE

SIJU VARGHESE (Querist)

30 March 2010 First up on thanks for your valuable reply. But I didn't get a proper solution.

Can I make the following entry,

1.Investment A/c Dr.(Asset)
To Bank Loan A/c(Liability)

2.Cash A/c Dr.
To Investment A/c (Drawings from
Partnership Firm)
To Interest on Investment A/c
(Interest on Capital
in Partnership Firm)

This will make the Proprietorship business more profitable. And also there is investment equal to the Loan amount.

Please consume some more time for me.

Thanking You

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