If the deed provides interest on capital but the firm has suffered a loss what will be the treatment of interest on capital?

Correct answer: It will not be allowed

The direct answer is B: interest on capital will not be allowed when the firm has suffered a loss. Interest on capital under a partnership deed is normally an appropriation of profit, meaning it is distributed from available profit after determining profit. It is not an ordinary business expense that must be charged even when there is no profit. Therefore, if the firm has a loss, no interest on capital is credited unless the deed or a special agreement clearly provides otherwise. Option A is wrong because the loss is not increased by allowing this appropriation; the amount is simply not allowed. Option B is correct. Option C is wrong because the amount is not automatically transferred to a loan account. Option D is wrong because the rule does not depend on whether a partner is active; it depends on the deed and availability of profit. A common mistake is treating interest on capital like interest on a business loan. A partner's capital is part of the partnership arrangement, so this interest is generally an appropriation, not an expense.