Accounting Adjustments for Loans by Partners
In addition, it is sometimes the case that an existing or previous partner will make a loan to the partnership in which case he becomes a creditor of the partnership. On the balance sheet, such a loan is not include as partners’ funds, but is shown separately as a long-term liability. This is the case whether or not the loan creditor is also an existing partner.
However, interest on such loans will be credited to the partner’s current account if he is an existing partner. This is administratively more convenient, especially when the partner does not particularly want to be paid the loan interest in cash immediately it becomes due. Remember:
- Interest on loans from a partner is accounted for as an expense in the profit and loss account, and not as an appropriation of profit, even though the interest is added to the current account of the partners.
- If there is no interest rate specified, the partnership act provides for to be paid at 5% per annul on loans by partners.