Open In App

Accounting Treatment of Partner’s Loan, Rent Paid to a Partner, Commission Payable to a Partner, Manager’s Commission on Net Profit

Improve
Improve
Like Article
Like
Save
Share
Report

Partner’s Loan:

Partner’s Loan is created to Partner’s Loan Account and not to Partner’s Capital A/c. A Loan advanced by any partner is a charge against profit and not an appropriation of profit. According to the Indian Partnership Act,1932, Partner’s Loan is repaid in priority to capital at the time of  dissolution. Interest on Partner’s Loan is given at an agreed rate or @6% p.a. in case of absence of any agreement to it.

Interest on Loan is allowed whether the firm has earned profit or not. Interest on Partner’s Loan is credited to a separate account, i.e., Partner’s Loan Account. Interest payable on the partner’s loan is debited to the Profit and Loss Account and not debited to the Profit and Loss Appropriation Account.

Accounting Treatment of Partner’s Loan (Journal Entries):

A. Interest paid in cash:

 

B. Interest due but not paid:

 

C. On Transfer of Interest on Partner’s Loan to Profit and Loss Account:

 

Illustration: 

Sunita and Anita are partners sharing profit and losses in the ratio of 4:3. Anita has advanced a loan of ₹32,000 for the business on 1st August,2021. The Partnership deed provides 7.5% interest to be allowed on loan advanced by the partner. Pass journal entries for the year ended on 31st March 2022.

Solution:

 

Working Notes: 

1. Calculating Interest on Anita’s Loan:

Interest on Anita’s Loan = 32,000\times \frac{7.5}{100}\times \frac{8}{12}

Interest on Anita’s Loan = ₹1,600

Rent paid to a Partner:

When a partner lends its property for the use of a business purpose, the partner receives rent. Rent paid to a partner is charged on the profit and not an appropriation of profit. Rent to a partner is debited to the Profit and Loss Account and not to the Profit and Loss Appropriation Account. It is credited to Partner’s Capital (Current, when capitals are fixed) Account.

Accounting Treatment of Rent Paid to a Partner (Journal Entries):

A. On Rent Credited to Partner’s Capital Account:

 

B. On transfer to Profit and Loss Account:

 

Illustration: 

M and N are business partners. They started the business by contributing capitals ₹ 70,000 and ₹65,000, respectively. M provides his flat for business use, and charges ₹22,000 yearly as rent. Pass necessary journal entries.(Assume capitals are fluctuating)

Solution:

 

Commission Payable to a Partner:

Commission paid to a Partner is an item of profit appropriation. Commission is payable to a partner when the Partnership Deed provides. A percentage of net profit after charging such commission or before charging such commission can be provided to partners as per the agreement. Commission is allowed only if there are profits. It is debited to the Profit and Loss Appropriation Account and credited to the Partners Capital (Current, if capital is fixed) Account being an appropriation of profit.

Accounting Treatment of Partner’s Commission (Journal Entries):

A. On Charge of Partner’s Commission to Partner’s Capital Account:

 

B. On appropriation of Partner’s Commission:

 

Calculation of Partner’s Commission:

1. On Profit before charging such commission:

Partner’s Commission = Net~Profit\times  \frac{Rate~of~Commission}{100}

2. On Profit after charging such commission:

Partner’s Commission =  Net~Profit\times  \frac{Rate~of~Commission}{100+Rate~of~Commission}

Illustration: 

D and E are partners sharing profit and losses equally. D is entitled a salary of ₹17,000 p.a. and E is entitled to commission of 8% on net profit before charging such commission. Net profit for the year ended on 31st March 2022 was ₹63,500. Pass necessary Journal entries under fluctuating capital method. 

Solution:

 

Working Notes: 

1. Calculating E’s commission: 

Net Profit = Profit – D’s Salary
Net Profit = ₹63,500-₹17,000
Net Profit = ₹46,500

E’s Commission = Net~Profit\times \frac{Rate~of~Commission}{100}
E’s Commission = 46,500\times \frac{8}{100}
E’s Commission = ₹3,720

Manager’s Commission on Net Profit:

The manager of the business is given certain percentage of commission on net profit. Manager’s commission is an expense for the business. It is charged to profit and debited to Profit and Loss Account. Profit and Loss A/c is debited, and Manager’s Commission A/c is credited with the amount of commission on net profit.

Manager’s Commission is given on either net profit before charging such commission or on net profit after charging such commission. Manager’s Commission is to be calculated on corrected Net Profit of the Profit and Loss Account, when the question is silent.

Accounting Treatment of Manager’s Commission (Journal Entries):

 

Calculation of Manager’s Commission:

1. On Profit before charging such commission:

Manager’s Commission = Net~Profit\times \frac{Rate~of~Commission}{100}

2. On Profit after charging such commission:

Manager’s Commission =  Net~Profit\times  \frac{Rate~of~Commission}{100+Rate~of~Commission}

Illustration:

P and R are partners in a firm sharing profit and loss in the ratio 5:3. They appointed a Manager for the business on the condition of 6.5 % commission on net profit after charging such commission. Net Profit for the year ended on 31st March 2022 was ₹54,000. Pass the necessary journal entry.

Solution:

 

Working Notes: 

1. Calculation of Manager’s Commission:

Manager’s Commission = Net~Profit\times  \frac{Rate~of~Commission}{100+Rate~of~Commission}
Manager’s Commission = 54,000\times  \frac{6.5}{100+6.5}
Manager’s Commission = ₹3,295.7



Last Updated : 05 Apr, 2023
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads