Interest of Capital of Partners- Appropriation of Profit and Loss

Summary: Interest on Capital is entitled to partners only when it is specified in the Partnership Deed. The proposal for offering the interest on capital is to recompense the opportunity cost underwent by the partners by not endowing the money elsewhere in securities with modest or no hazard. When the partners provide unequal capitals however the profits are shared equally or if the profit sharing ratio is varied from ratio of contributed capital the charge of interest against the firm on contributed capital by every partner are defensible to alleviate differential advantage of one partner over the other. The amount of interest on capital is to be computed on the basis of time after taking into account the introduction or withdrawal of capital. The Profit or Loss Appropriation Account is debited and Partners Capital or current account is credited with the interest on capital. In this context it must be noted that interest on capital is accountable to a firm to the degree of obtainable profit only in view of the fact that interest on capital is an appropriation of profit. An illustration will explain this concept in a better way.
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Illustration: A and B are partners with a profit sharing ratio of 3:2. They earn $7,500 as profit before allowing interest on capital @ 10% p.a. As Capital was $60,000 and Bs was $30,000. Interest payable to the partners comes to around $ 9,000 (i.e. A - $6,000 and B - $3,000). In the absence of any special stipulation in this view in the partnership deed, A will get $5,000 and B will get $2,500 only i.e. $7,500 will be divided in the ratio of interest originally payable to partners. Nevertheless by accord partners may give up the above restraint and in such a case, the ensuing loss (after offering whole interest) would be abided by the partners in the profit sharing ratio. Solution:

When there is an agreement between the partners:

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