In a partnership firm, the partners invest the amount as capital as per partnership deed. According the partnership deed they may have the clause of interest to be paid by the partnership firm on the capital employed by the individual partners. This clause is very much useful in case where the different amounts are invested by the partners.  To avoid any differences among the partners in respect of investment made by them, a certain percentage of interest is paid to them on their capital employed as agreed upon.

Treatment of Interest on Capital of Partners in Final Accounts

Interest on partner’s capital account is indirect expenses for a partnership firm and is shown in expenses side of the profit and loss account. Unpaid interest in being shown as interest payable or outstanding expenses or expenses payable in liabilities side of balance sheet. Some time the interest amount is credited to the capital account of the partners, if not to be paid during current financial year.

Accounting Treatment of Interest on Partner’s Capital Account

a) In case of interest paid in cash or by cheque:-

Type of voucher to be prepared:-   Cash or Bank payment voucher

Entry to be made

Debit:-  Interest on Partner’s Capital Account

Credit:-  Cash Account or Bank Account

b) In case of unpaid interest:-

Type of voucher to be prepared:- Journal voucher

Entry to be made

Debit:-    Interest on Partner’s Capital Account

Credit:-  Interest Payable Account

or

Outstanding Expenses Account

or

Expenses Payable Account

or

Partner’s Capital Account

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