There is loss in the year but interest on drawings is clearly provided in the deed. How will it be treated in appropriation account?

Correct answer: As a credit item

The direct answer is A: interest on drawings is treated as a credit item in the Profit and Loss Appropriation Account. Drawings are amounts withdrawn by a partner for personal use. Interest on drawings is charged to that partner, so it is income or a recovery for the firm. Income is credited in the appropriation account. This treatment applies even when the firm has an overall loss, provided that the partnership deed clearly requires interest on drawings. Option A is correct because the amount increases the credit side of appropriation. Option B is wrong because a loss does not automatically cancel a clearly agreed charge. Option C is wrong because interest on drawings is not an expense of the firm; it is recoverable from the partner. Option D is wrong because interest on capital is a separate item, normally a charge or appropriation in favour of partners, not the same as interest on drawings. Exam cue: drawings interest comes from the partner to the firm, so remember “drawings interest—credit.”