Under the statutory provisions of the Partnership Act 1890, where a partner advances a financial loan to the business in excess of their agreed capital and the firm incurs an operating loss for the year, the partner remains legally entitled to 5% per annum interest on the loan, which is debited to the Profit and Loss Account as a charge against profit and thereby increases the net loss apportioned equally among the partners.
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True. Under the Partnership Act 1890, interest on a partner's loan is a charge against profit (an operating expense in the Profit and Loss Account), not an appropriation of profit. Therefore, it is payable at the statutory rate of 5% per annum regardless of whether the business makes a profit or a loss, thereby increasing the overall net loss to be shared equally among the partners.
The statement is true because the Partnership Act 1890 treats a partner's loan advance as a creditor liability of the firm. Interest on such loans at the statutory default rate of 5% per annum is a charge against profit that must be debited to the main Profit and Loss Account. Because it is an expense, it is payable even when the firm suffers an operating loss, which consequently increases the net loss to be distributed equally among partners.
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Statutory treatment of partner loan interest as a charge against profit under the Partnership Act 1890