Why is interest on partners loan not shown in Profit and Loss Appropriation Account?

Correct answer: Because it is a charge against profit

Interest on a partner’s loan is paid because the partner has lent money to the firm. It is therefore a cost of obtaining finance, just as interest on an outside loan would be a business expense. This cost is considered before the firm’s net profit is determined, so it is called a charge against profit.

Because it is a charge, it is recorded in the Profit and Loss Account and not in the Profit and Loss Appropriation Account. The appropriation account is used for distributing an already determined profit, such as recording partners’ salaries, interest on capital, or shares of profit. Loan interest is not a distribution of profit. Therefore option A correctly explains why it is excluded from the appropriation account.