Capital Interest and drawing interest

partnership firm is not like companies. sometimes there are firms where a partner alone contributes capital and another partner takes care of the busniess without investing. in that case the partner who contributes the capital gets interest on capital which shall not exceed 12% as per act. a lower percentage may be specified in the partnership deed.

You have pass  entries in the books of accounts  as per capital  employed in the busniess  fluctuating or fixed capital  method .

J.E  as per  fluctuating   capital  method  for Interest on capital 

1)  Interest on Partners capital  A/c Dr 

     To  partners Capital              A/c Cr 

(  Being  interest  paid on capital  to  partners )

2)  Profit & Loss  Appropriation A/c         A/c  Dr 

     To Interest  on partners capital           A/c  Cr 

( Interest transfer to P&L  Appo) 

J.E  for Interest  on  Drawings 

1)  Partners capital                                   A/c    Dr 

     partners Interest on  Drawings            A/c    Cr

(  Being  interest  earned on  Drawings    ) 

2)  partners  interest  on Drawings           A/c    Dr 

     To Profit  & Loss  Appropriation           A/c     Cr 

(   Being  interest income  transfer to P&L  Appo ) 

J.E for interest on capital  in  Fixed capital method 

1)  Interest on partners capital                          A/c Dr 

     To  partners  current   Account                     A/c Cr 

(being interest paid to partners ) 

2)   Profit & Loss   Appropriations                      A/c  Dr 

      To  Interest  on  partners  capital                  A/c  Cr 

(Interest transfer to P&L Appo)

J.E  for drawings iin fixed capital  method 

1)   partners Current   account                                 A/c  Dr 

      To  Interest  On  partners  Drawings                  A/c   Cr 

(Being interest  earned   on drawings )

2)   Interest  on partners Drawings                          A/c    Dr 

       To  Profit  & Loss  Appropriations                      A/c    Cr 

(Interest credited to P&L  Appo )