If the deed provides both interest on capital and interest on loan where is interest on loan more appropriately shown?

Correct answer: Profit and Loss Account

Direct answer: Option A, Profit and Loss Account. First understand the rule: interest on a partner’s loan is a finance cost owed for the use of money lent to the firm. It is not a distribution of profit. Therefore it is charged against profit before the remaining profit is distributed among partners. Step by step: the partner lends money; the firm becomes liable to pay interest; the liability is treated as an expense; the expense is recorded in the Profit and Loss Account; the profit left afterward is transferred for appropriation. Option A is correct because this account records ordinary business expenses and charges against profit. Option B, Profit and Loss Appropriation Account, is used after net profit is found, for items such as interest on capital, partner salary, commission and profit sharing; it is not the proper first account for partner-loan interest. Option C, Drawings Account, records amounts taken out by a partner, not interest payable on a loan given to the firm. Option D, Goodwill Account, records the value or adjustment of business reputation, not loan interest. Exam cue: interest on partner’s loan is normally a charge against profit, while interest on capital is normally an appropriation of profit. This answer assumes the usual partnership-accounting treatment and no special deed instruction changing presentation.