Interest on a partner's loan to the firm is:

A charge against profit, shown in the Profit and Loss Account

An appropriation of profit, shown in the Appropriation Account

A charge against profit, shown in the Profit and Loss Account

Allowed only if the partnership deed provides for it

The partnership deed is silent. X has capital of ₹8,00,000 and Y ₹2,00,000. Profit of ₹1,00,000 will be shared:

In the ratio 4:1, in proportion to capital

After allowing 6% interest on capital, then equally

Under the fixed capital method, a partner's share of profit is credited to:

The Drawings Account, permanently

Interest on capital due is ₹60,000 in total but the profit for the year is only ₹45,000. Interest allowed will be:

₹45,000, distributed in the ratio of the interest due

₹60,000, with the shortfall carried forward

₹45,000, distributed in the ratio of the interest due

Nil, because the profit is insufficient

₹45,000, distributed in the profit-sharing ratio

A, B and C share profits 5:3:2. A guarantees C a minimum of ₹50,000. Profit is ₹2,00,000. C's deficiency is borne by:

Nobody — C simply receives ₹40,000

Rent paid to a partner for the use of their building is:

Debited to the Profit and Loss Account as a charge

Debited to the Profit and Loss Appropriation Account

Debited to the Profit and Loss Account as a charge

Credited to the partner's Capital Account only if the deed allows

Ignored, since a partner cannot charge the firm rent

It is found that interest on capital was omitted in an earlier year. The correction is made through:

A Profit and Loss Adjustment Account in the current year

Reopening and redrafting that year's final accounts

A Profit and Loss Adjustment Account in the current year

A note in the balance sheet, with no entry

Charging the amount to the current year's Profit and Loss Account

Partnership — Fundamentals and the Appropriation Account

Partnership accounts are the largest block in the paper, and everything in the later chapters — admission, retirement, death, dissolution — stands on this one. The idea underneath it is a single distinction that the whole topic then elaborates: a charge against profit versus an appropriation of profit. Rent paid to a partner is an expense the firm would owe whether or not it earned anything, so it belongs in the Profit and Loss Account. Interest on a partner's capital is a way of dividing up profit that has already been earned, so it belongs in the Profit and Loss Appropriation Account. Put an item in the wrong statement and every figure after it is wrong, which is exactly why examiners keep testing it.

Charge Against Profit or Appropriation of Profit

Learn the test, not the list. A charge is owed regardless of profit — it is made even when the firm has a loss, and it makes the loss bigger. An appropriation is a distribution of profit that has already been earned, so it can only be made out of available profit. From that one test, every item places itself.

Where each item goes, and why
Item	Charge or appropriation	The reason
Rent paid to a partner	Charge → Profit & Loss Account	Owed for the use of property, profit or no profit
Interest on a partner's loan (not capital)	Charge → Profit & Loss Account, at 6% p.a. if the deed is silent	A lender's right, so the partner is a creditor here, not an owner
Manager's commission	Charge → Profit & Loss Account	An employee's contractual due
Interest on capital	Appropriation	A reward to an owner for capital contributed
Partner's salary or commission	Appropriation	A reward to an owner for effort, not an employment contract
Transfer to reserve	Appropriation	Setting aside profit that has been earned
Interest on drawings	A gain to the firm, credited in the Appropriation Account	Charged to the partner for taking money out early

⚠️ Interest on a partner's loan is not interest on capital

These two look alike and behave in opposite ways, so the examiner puts both in the same question. Interest on a loan is a charge: it is allowed at 6% per annum even if the deed says nothing, it is paid even in a loss year, and it goes to the Profit and Loss Account. Interest on capital is an appropriation: it is allowed only if the deed provides for it, it is not allowed at all in a loss year, and it goes to the Appropriation Account. The reason for the asymmetry is worth holding onto — when a partner lends money they are acting as a creditor of the firm, and creditors are paid before owners share anything.

When the Deed Is Silent — the Act Fills the Gap

A partnership deed can say anything the partners agree on. When it says nothing, the Indian Partnership Act, 1932 supplies the default — and the defaults are a favourite one-mark question because several of them are counter-intuitive.

Profit sharing: equal, no matter how unequal the capitals are. A partner who brought in ₹9,00,000 and one who brought ₹1,00,000 share equally unless the deed says otherwise.
Interest on capital: not allowed. Not "at 6%" — not allowed at all.
Interest on drawings: not charged.
Salary or commission to a partner: not allowed.
Interest on a partner's loan: allowed at 6% per annum. This is the one default that does give a rate.

🎯 Why "6%" is the most expensive thing to half-remember

Almost every student remembers that the Act mentions 6%. Far fewer remember that it attaches to loans only. So when a question says the deed is silent and a partner has both capital and a loan in the firm, the tempting answer allows 6% on both — and loses marks twice, once for the interest on capital that should not exist and once for the profit distribution that follows from it. Read the wording carefully: "capital" and "loan" are different words doing different work, and a question that mentions both is usually testing exactly this.

Interest on Capital and on Drawings

Two calculations, and in both the difficulty is the time period, not the arithmetic. Interest on capital runs on the opening balance, with any fresh capital introduced during the year earning interest only for the months it was actually in the business. Interest on drawings runs the other way — from the date of each withdrawal to the year end.

The average-period shortcuts for equal monthly drawings
Drawings made	Average period	Because
At the beginning of each month	6.5 months	First lot is out 12 months, last 1 → (12+1)/2
At the end of each month	5.5 months	First lot is out 11 months, last 0 → (11+0)/2
In the middle of each month	6 months	The two ends average out exactly
Evenly through the year, dates not given	6 months	The standard assumption when nothing is stated

🧠 A worked appropriation, start to finish

A and B start with capitals of ₹4,00,000 and ₹2,00,000, share profits 3:2, and the deed allows 10% interest on capital and a ₹60,000 salary to B. Profit before appropriations is ₹2,00,000; B drew ₹10,000 at the end of each month with interest at 6%.

Interest on capital: ₹40,000 and ₹20,000 → ₹60,000. B's salary ₹60,000. Interest on B's drawings: 1,20,000 × 6% × 5.5/12 = ₹3,300, credited to the Appropriation Account. So distributable profit = 2,00,000 + 3,300 − 60,000 − 60,000 = ₹83,300, divided 3:2 as ₹49,980 and ₹33,320.

Notice the order the statement forces: interest on drawings is added before the appropriations are deducted, because it is the firm's gain, not a cost. Working top to bottom in that order is what keeps a long question from unravelling.

When Profit Will Not Cover the Appropriations

This is where the charge-versus-appropriation distinction earns its keep. An appropriation cannot exceed the profit available, so when the deed promises more than the year earned, the promises are scaled down rather than paid in full.

If profit is less than the total appropriations due, distribute the available profit in the ratio of those appropriations, and allow nothing more.
If there is a loss, no interest on capital and no partner's salary are allowed at all; the loss is shared in the profit-sharing ratio.
Charges are unaffected by any of this — rent and loan interest are paid, and they are what turned the profit into a loss in the first place.

⚠️ A guaranteed minimum is met by the guarantor, not by the firm

When one partner guarantees another a minimum share, first divide the profit in the ordinary ratio. If the guaranteed partner's share falls short, the deficiency is borne by the guaranteeing partner alone — deducted from that partner's share, not from all the others. If the guarantee is given by the firm, then the deficiency is shared by the remaining partners in their mutual ratio. Reading which of the two was promised is the whole question, and the tempting error is to spread a single partner's guarantee across everyone, which quietly changes three numbers at once.

Fixed and Fluctuating Capital

Two methods, and what appears where
Point	Fixed capital	Fluctuating capital
Number of accounts	Two — Capital and Current	One — Capital only
Capital account changes when	Only on fresh capital or withdrawal of capital	Every year, with every adjustment
Interest, salary, drawings, profit go to	The Current Account	The Capital Account
Can the balance be negative?	Capital never; Current can be (shown on the assets side)	Yes, the capital itself can go negative

ℹ️ Past adjustments and the Profit and Loss Adjustment Account

When an error from an earlier year comes to light — interest on capital omitted, a salary not recorded, profits shared in the wrong ratio — the accounts of that year are not reopened. Instead a Profit and Loss Adjustment Account puts right the net effect on each partner in the current year. The practical method is to work out what each partner should have received and what they did receive, and pass one entry for the difference: the partner who gained is debited and the one who lost is credited. Trying to redo the whole year is the slow route to the same answer, and in an examination it is usually the route that runs out of time.

Key takeaways

A charge is owed regardless of profit and goes to the Profit and Loss Account; an appropriation divides profit already earned and goes to the Appropriation Account.
Rent to a partner, interest on a partner's loan and manager's commission are charges. Interest on capital, partner's salary and reserve transfers are appropriations.
If the deed is silent: profits equal, no interest on capital, no interest on drawings, no partner salary — but loan interest at 6% p.a.
The Act's 6% attaches to a partner's loan only, never to capital.
Average period for equal monthly drawings: 6.5 months at the beginning, 5.5 at the end, 6 in the middle.
Interest on drawings is credited to the Appropriation Account before appropriations are deducted — it is the firm's gain.
If profit is short of the appropriations due, distribute it in the ratio of those appropriations; in a loss year allow neither interest on capital nor partner salary.
A minimum guaranteed by one partner is met by that partner alone; one guaranteed by the firm is shared by the rest in their mutual ratio.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Interest on a partner's loan to the firm is:
1. An appropriation of profit, shown in the Appropriation Account
2. A charge against profit, shown in the Profit and Loss Account
3. Allowed only if the partnership deed provides for it
4. Not allowed in a year of loss
Show answer
Answer: B — A charge against profit, shown in the Profit and Loss Account
When a partner lends to the firm they act as a creditor, not an owner, so the interest is an expense the firm owes whether or not it profits — a charge, and it is paid even in a loss year. Options 3 and 4 both describe interest on capital, which is the appropriation that needs the deed and vanishes in a loss year. That pairing is the standard trap in this topic.
The partnership deed is silent. X has capital of ₹8,00,000 and Y ₹2,00,000. Profit of ₹1,00,000 will be shared:
1. In the ratio 4:1, in proportion to capital
2. Equally, ₹50,000 each
3. After allowing 6% interest on capital, then equally
4. In the ratio 3:1
Show answer
Answer: B — Equally, ₹50,000 each
With no agreement the Act requires profits to be shared equally, however unequal the capitals. Option 1 feels fair and is the commonest wrong answer — capital ratio applies only if the deed says so. Option 3 misapplies the Act's 6%, which attaches to a partner's loan and never to capital, and interest on capital is not allowed at all when the deed is silent.
A partner withdraws ₹5,000 at the end of every month for a year. Interest on drawings at 6% p.a. is:
1. ₹1,950
2. ₹1,650
3. ₹3,600
4. ₹1,800
Show answer
Answer: B — ₹1,650
Total drawings ₹60,000, average period 5.5 months for end-of-month withdrawals: 60,000 × 6/100 × 5.5/12 = ₹1,650. The ₹1,950 option uses 6.5 months, which applies to beginning-of-month drawings, and ₹1,800 uses a flat 6 months — the whole question is which end of the month was named.
Under the fixed capital method, a partner's share of profit is credited to:
1. The Capital Account
2. The Current Account
3. The Profit and Loss Account
4. The Drawings Account, permanently
Show answer
Answer: B — The Current Account
Under the fixed capital method the Capital Account moves only when capital is actually introduced or withdrawn; everything else — profit share, interest, salary, drawings — passes through the Current Account. That is the whole point of the method, and it is why a Current Account can show a debit balance (appearing on the assets side) while capital cannot.
Interest on capital due is ₹60,000 in total but the profit for the year is only ₹45,000. Interest allowed will be:
1. ₹60,000, with the shortfall carried forward
2. ₹45,000, distributed in the ratio of the interest due
3. Nil, because the profit is insufficient
4. ₹45,000, distributed in the profit-sharing ratio
Show answer
Answer: B — ₹45,000, distributed in the ratio of the interest due
Interest on capital is an appropriation, so it cannot exceed available profit: the ₹45,000 is allowed and split in the ratio of the interest each partner was due, not in the profit-sharing ratio — which is what makes option 4 the tempting near-miss. Option 3 confuses insufficient profit with a loss; only an actual loss reduces the interest to nil.
A, B and C share profits 5:3:2. A guarantees C a minimum of ₹50,000. Profit is ₹2,00,000. C's deficiency is borne by:
1. A and B in the ratio 5:3
2. A alone
3. All three partners equally
4. Nobody — C simply receives ₹40,000
Show answer
Answer: B — A alone
C's ordinary share is 2/10 of ₹2,00,000 = ₹40,000, a deficiency of ₹10,000 against the guarantee. Because A alone gave the guarantee, A alone bears it: A takes ₹1,00,000 − ₹10,000 = ₹90,000. Option 1 would be right only if the firm had guaranteed the minimum, and that substitution is the trap — read who promised before allocating anything.
Rent paid to a partner for the use of their building is:
1. Debited to the Profit and Loss Appropriation Account
2. Debited to the Profit and Loss Account as a charge
3. Credited to the partner's Capital Account only if the deed allows
4. Ignored, since a partner cannot charge the firm rent
Show answer
Answer: B — Debited to the Profit and Loss Account as a charge
The rent is owed for the use of property whether or not the firm profits, so it is a charge and belongs in the Profit and Loss Account — the partner is acting as a landlord here, not as an owner sharing profit. Option 1 is the natural-looking error because the payment goes to a partner, but who receives the money does not decide the classification; the nature of the obligation does.
It is found that interest on capital was omitted in an earlier year. The correction is made through:
1. Reopening and redrafting that year's final accounts
2. A Profit and Loss Adjustment Account in the current year
3. A note in the balance sheet, with no entry
4. Charging the amount to the current year's Profit and Loss Account
Show answer
Answer: B — A Profit and Loss Adjustment Account in the current year
Closed accounts are not reopened; a Profit and Loss Adjustment Account records the net effect on each partner in the current year — compare what each should have received with what they did, then debit the gainer and credit the loser. Option 4 is wrong because this is not a current-year expense at all: it is a redistribution between partners, and routing it through the Profit and Loss Account would understate this year's profit.