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CSEET · Fundamentals of Accounting · Partnership and LLP Accounts

Kiran and Lata are partners. The partnership deed is silent on interest on capital. Kiran contributed Rs 3,00,000 and Lata Rs 1,00,000 as capital. How should the profit be treated for interest on capital?

No interest on capital is allowed when the partnership deed is silent. Interest on capital arises only by agreement between partners, so without it the profits are divided in the agreed profit-sharing ratio, whatever the amounts of capital contributed by each.

  1. AInterest at 6% p.a. is allowed on capital
  2. BInterest on capital is allowed in the ratio of capitals
  3. CNo interest on capital is allowed; profit is shared as per the agreed ratioCorrect
  4. DInterest is allowed only to the partner with higher capital

Explanation

Interest on capital is allowed only if the partners agree to it. If the deed is silent, no interest is allowed on capital, and profits are shared in the agreed profit-sharing ratio. Options A, B and D assume a right that does not exist without agreement.

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