If interest on a partner’s loan of Rs 7,500 has not been deducted from net profit, what will be done before appropriation?

Correct answer: Deduct Rs 7,500 from net profit

The governing concept is the distinction between a charge against profit and an appropriation of profit. Interest on a partner’s loan is normally a charge against the firm’s profit when it is payable under the deed or applicable law. It must therefore be deducted while determining the firm’s true profit, before that profit is transferred to the Profit and Loss Appropriation Account. If Rs 7,500 was omitted, the correction is to reduce the stated net profit by Rs 7,500; the amount available for appropriation consequently falls by the same amount. Adding it, crediting it as an appropriation, or distributing it among partners would apply the wrong treatment. Hence option A is correct.