The deed says interest on loan and then interest on capital are to be considered before profit distribution. Which one will first appear like an expense?

Correct answer: Interest on loan

The governing concept is the distinction between a charge against profit and an appropriation of profit. Interest on a partner’s loan is a financing cost payable because the partner has acted as a lender. It is therefore treated as an expense or charge and is considered before determining the profit available for distribution. Interest on capital is normally an appropriation of the profit after it has been calculated, even though the deed may specify its payment. Interest on drawings is income for the firm, while dividend belongs to company accounting and is not a normal partnership item. Consequently, interest on loan appears first as an expense, so option A is correct.