Partners can get loans from partnership businesses. Partners run a partnership-owned company. Partners can lend money to other Partnership firm partners. The Partnership owes the Partner the difference between the Withheld Amount and the Distributable Amount when it pays the tax department.
Showing the Meaning of Partners Loan Account
The Indian Partnership Act of 1932 says that partner loans are paid back before capital when a partnership ends. Interest on partners' loan is provided at a rate agreed upon, or @6% per year if nothing has been decided upon. Even if a business hasn't made any money, it can still charge interest on loans. After payment of partners, loan payment should be made to the partner's loan Account. The Partner's Loan Account holds interest. The Profit and Loss Account pays the partner's loan interest.
Defining the Treatment of Partners Loan Accounts
Treatment of Partners’ Loan Account
A loan is not a core component of a partner's capital; therefore, it is considered the same as a loan from a third party. The partnership's liability will be documented by making a liability, which will give the loan amount as a credit balance. How the loan was decided will determine the debit entry. When the partner puts money into the bank account, there will be a debit entry in the bank account. When a part of the partner's capital was used to make the loan, the debit entry will appear in the partner's capital account. The amount of the Partner's loan is in the Realisation Account.
In simple terms, a partners loan is made to the partners' loan account. A loan given by one partner to another is a pay-against-profit, not a theft of profit. Interest paid by a partner on a loan to the company is an expense for the company and is taken out of the profit and loss account. It is given to the partners and added to their loan accounts.
Format of Partners Capital Account
Partner’s Loan account format
Partner’s Loan Account (Liabilities)
Loans to Partner’s Account (Asset)
How the Partners’ Loan Account is Handled
The rest of partners can pay the retiring partner's final payment all at once or treat it as a loan and repay it in installments. The amount owed to the retiring partner is thought of as a loan from the retiring partner to ensure that the other parties involved do not have to find the money right away from somewhere else.
But in this case, the retiring partner also gets the interest income. Often, the residual partners pay back the loan amount in equal parts with interest added to the balance which will be shown in the partners' loan account format. In this case, we divide the loan into equal portions and figure out how much interest to charge on balance. The payment will include both the principal and the interest.
Question - The earnings and loss for the business are split 4:3 between Sunita and Anita. On August 1, 2021, Anita provided the company with a $32,000 loan. The Partnership Agreement permits Partners to charge 7.5% interest on any loans made to the Partnership. Create a journal entry for the fiscal year ending on March 31, 2022.
Answer - Journal Entry
Calculating Interest on Anita’s Loan:
Interest on Anita’s Loan = 32,000 x 7.5/100 x 8/12
Interest on Anita’s Loan = ₹1,600
Loans are treated as a liability to the businesses as the amount of money is taken out from the partnership firm. In this situation, money is taken from the other partner’s A/c and put into Bank A/c. A loan is not part of a partner's capital and is treated the same way as a loan from a third party. The partners’ loan would be recorded by making a liability, which will give the loan amount as a credit balance.