There are three problems relating to the Interest on loan:

(a) Rule regarding……whether to allow or not (as already discussed).

(b) Calculation………The amount of Interest on Loan (now being discussed).

## Calculation of Interest on Loan

Interest on Loan is always calculated with respect to the period it has been used in the business. Simple Interest formula is to be used:

Interest on Loan = (Amount*Rate*Months)/1200

Example:

Interest on Loan @ 6% p.a. on ₹30,000 for the whole year can be calculated as under:

Interest on Loan= (30,000*6*12)/100*12= 1,800 or directly=6% of 30,000 (for full year).

Example:

Interest on Loan @ 6% p.a. on ₹30,000 advanced on 1st July can be calculated as under:

Interest on Loan= (30,000*6*6)/100*12= 900.

(c) Treatment…………Journal entries and Ledger accounts

Treatment:

(a) Interest on Loan A/c                             Dr.

To Partner’s Loan A/c

(b)Profit and Loss A/c                                Dr.

To Interest on Loan A/c

Note: In no case Interest on Loan should be recorded in Profit and loss account or Capital account of the partners.