When interest on capital given written in agreement than this interest is treated as charge and all charges are charge form current year profit.

Interest on Capital in Partnership

Interest on capital is a way for partners in a partnership to receive a return on their invested capital. It is typically specified in the partnership agreement and serves as a way to compensate partners for the use of their capital in the business.

Options for Payment of Interest on Capital

There are various options for payment of interest on capital, including:

a) Current Profits: This option allows partners to receive interest on their capital only if the partnership has sufficient current profits. Current profits are the profits earned by the partnership during the current accounting period.

b) Reserves: Reserves are accumulated earnings of the partnership that are set aside for various purposes, such as future investments or contingencies. Partners may receive interest on their capital from these reserves, provided that the partnership agreement allows for it.

c) Accumulated Profits: Accumulated profits are the total profits earned by the partnership since its inception. Partners may receive interest on their capital from these accumulated profits, if specified in the partnership agreement.

d) Goodwill: Goodwill is the value of a business beyond its tangible assets, such as its reputation, customer base, and brand. It is typically only considered when a partnership is dissolved or when a partner leaves the business. Interest on capital is not typically paid from goodwill.

Correct Answer Explanation

The correct answer is option A, which states that interest on capital will be paid to the partners from current profits. This means that partners will only receive interest on their capital if the partnership has sufficient profits in the current accounting period. This is a common practice in partnerships, as it ensures that partners are rewarded for their capital investment when the business is performing well.

It is important to note that the payment of interest on capital is subject to the terms and conditions specified in the partnership agreement. Partners should carefully review the agreement to understand the provisions related to the payment of interest on capital and any other relevant terms.

In conclusion, interest on capital in a partnership is typically paid from current profits, as specified in the partnership agreement. Partners should review the agreement to understand the terms and conditions related to the payment of interest on capital.