Three types of financial claims arise in favour of partners before profits are shared: Interest on Capital (a reward for the capital locked in the business), Partner's Salary and Commission (a reward for active management), and Interest on Drawings (a charge for withdrawing money from the firm). Correctly computing each of these — especially when capital changes mid-year or drawings occur on different dates — is a core numerical skill tested in CBSE Class 12 board exams. This note covers every formula, every case, and every trap with fully worked examples and verified numbers.
1. Interest on Capital (IOC)
Interest on Capital is paid to partners as a reward for the capital they have contributed to the firm. It is debited in the P&L Appropriation Account (reduces distributable profit) and credited to partners' Capital/Current Accounts.
Basic Formula
Case 1 — Capital unchanged throughout the year
Example: Capital = ₹1,00,000; Rate = 10% p.a. → IOC = ₹10,000
Case 2 — Additional Capital introduced mid-year
IOC is calculated separately on opening capital for 12 months and on the addition from the date it was introduced.
| Scenario |
IOC Formula |
| Opening capital ₹1,00,000; additional ₹50,000 introduced on 1 Oct (6 months into year); Rate 10% |
₹1,00,000 × 10% × 12/12 + ₹50,000 × 10% × 6/12 = ₹10,000 + ₹2,500 = ₹12,500 |
| Capital ₹2,00,000; permanent withdrawal of ₹40,000 on 1 Oct; Rate 10% |
₹2,00,000 × 10% × 6/12 + ₹1,60,000 × 10% × 6/12 = ₹10,000 + ₹8,000 = ₹18,000 |
IOC when profit is insufficient
If the partnership deed states IOC is "payable only out of profits" and the profit is less than total IOC due:
- IOC is restricted to the available profit.
- The restricted amount is distributed in capital ratio (not PSR, not IOC ratio).
- No balance remains for profit distribution — all profit is exhausted by IOC.
2. Interest on Drawings (IOD)
Interest on Drawings is charged to partners for money withdrawn from the firm. It is credited in the P&L Appropriation Account (increases distributable profit) and debited to partners' Capital/Current Accounts.
Method 1 — Simple Interest on Lump Sum Drawing
| Timing of Drawing |
Months to charge interest |
Formula |
| Beginning of year (1 April) |
12 months |
Drawing × Rate/100 × 12/12 |
| Middle of year (1 October) |
6 months |
Drawing × Rate/100 × 6/12 |
| End of year (31 March) |
0 months (nil) |
Zero interest (no time to charge) |
| Date not given |
6 months (assumed mid-year) |
Drawing × Rate/100 × 6/12 |
Method 2 — Equal Monthly Drawings (Average Period Method)
| If drawn at... |
Average period |
Formula |
| Beginning of each month |
6.5 months |
Monthly Drawing × 12 × Rate/100 × 6.5/12 |
| End of each month |
5.5 months |
Monthly Drawing × 12 × Rate/100 × 5.5/12 |
| Middle of each month |
6 months |
Monthly Drawing × 12 × Rate/100 × 6/12 |
Method 3 — Product Method (Drawings on Different Dates)
When drawings are made at irregular intervals and amounts:
or equivalently:
Product Method — Worked Example
A partner (year ends 31 March) made drawings: 1 April ₹6,000; 1 July ₹4,000; 1 January ₹2,000. IOD rate = 12% p.a.
| Date |
Amount (₹) |
Months to 31 Mar |
Product |
| 1 April | 6,000 | 12 | 72,000 |
| 1 July | 4,000 | 9 | 36,000 |
| 1 January | 2,000 | 3 | 6,000 |
| Total | 12,000 | | 1,14,000 |
3. Partner's Salary
When a partner devotes more time or has special expertise, the deed may provide a salary — payable before profit distribution.
- Salary is shown on the Debit side of P&L Appropriation A/c.
- Credited to the partner's Capital/Current A/c.
- Expressed as annual amount or monthly (convert to annual: monthly × 12).
- If the deed is silent — no salary is payable (IPA 1932 default).
- If profit is insufficient: depends on deed — "salary is a charge" (must pay even if loss) vs "out of profits" (restricted).
Journal Entry for Salary
| Journal Entry |
Dr. |
Cr. |
P&L Appropriation A/c Dr
To Partner's Capital/Current A/c |
XX |
XX |
4. Partner's Commission
Commission is payable to a partner for special services. Two bases are used:
| Basis |
Formula |
Example (Profit = ₹1,10,000; Rate = 10%) |
| On profit BEFORE charging commission |
Commission = Profit × Rate/100 |
₹1,10,000 × 10/100 = ₹11,000 |
| On profit AFTER charging commission |
Commission = Profit × Rate/(100 + Rate) |
₹1,10,000 × 10/110 = ₹10,000 |
Why the formula for "after" is different: If C = commission, then C = 10% of (Profit − C) → C = 0.1(P − C) → 1.1C = 0.1P → C = P/11 = P × 10/110. The "after" formula is always smaller than "before."
Verification for "after commission": Commission = ₹10,000. Profit after = ₹1,10,000 − ₹10,000 = ₹1,00,000. 10% of ₹1,00,000 = ₹10,000 ✓
Practice Questions (CBSE Board Level)
Q1 (4 marks — Guarantee + Appropriation): P, Q and R share profits in the ratio 2:2:1. Their capitals are: P = ₹80,000; Q = ₹60,000; R = ₹40,000. Interest on Capital (IOC) is allowed @ 10% p.a. Q is entitled to a salary of ₹5,000. P personally guarantees that R's total share (excluding salary but including IOC and profit share) will not be less than ₹10,000. The net profit before any appropriations is ₹50,000. Calculate each partner's final total share.
Explanation:
Step 1 — P&L Appropriation:
IOC: P = ₹8,000; Q = ₹6,000; R = ₹4,000. Total IOC = ₹18,000.
Q's salary = ₹5,000. Total deductions = ₹23,000.
Remaining Distributable Profit = ₹50,000 − ₹23,000 = ₹27,000.
Distribute the profit in the 2:2:1 ratio:
P's normal profit share = ₹10,800
Q's normal profit share = ₹10,800
R's normal profit share = ₹5,400
Step 2 — Check the guarantee for R:
R's actual total share = IOC (₹4,000) + normal profit share (₹5,400) = ₹9,400.
Guaranteed minimum = ₹10,000.
Deficiency = ₹10,000 − ₹9,400 = ₹600.
Since P personally guaranteed this, the ₹600 deficiency is deducted from P's profit share and added to R's profit share.
Final distribution of the ₹50,000 profit:
| Partner |
IOC (₹) |
Salary (₹) |
Profit Share (₹) |
Guarantee Adj. |
Total (₹) |
| P |
8,000 |
— |
10,800 |
−600 |
18,200 |
| Q |
6,000 |
5,000 |
10,800 |
— |
21,800 |
| R |
4,000 |
— |
5,400 |
+600 |
10,000 |
| Total |
18,000 |
5,000 |
27,000 |
— |
50,000 |
Q2 (3 marks — Product Method): A partner (in a firm where the financial year ends 31 March) made the following drawings: 1 April ₹6,000; 1 July ₹4,000; 1 January ₹2,000. Calculate the Interest on Drawings (IOD) @ 12% p.a. using the Product Method.
Explanation:
| Date |
Amount (₹) |
Months to 31 Mar |
Product (₹) |
| 1 April |
6,000 |
12 |
72,000 |
| 1 July |
4,000 |
9 |
36,000 |
| 1 January |
2,000 |
3 |
6,000 |
| Total |
12,000 |
|
1,14,000 |
Using the Product Method formula:
IOD = Total Product × Rate ×
IOD = ₹1,14,000 × × = ₹1,140
Q3 (2 marks): A manager-partner is entitled to a commission of 10% on the net profit after charging such commission. If the net profit before commission is ₹55,000, calculate the commission.
Explanation:
Formula for commission after charging:
Commission = Net Profit ×
Commission = ₹55,000 × = ₹5,000.
(Verification: Net profit after subtracting the commission = ₹55,000 − ₹5,000 = ₹50,000. 10% of ₹50,000 is indeed ₹5,000.)
Q4 (2 marks): A partner had a capital balance of ₹2,00,000 on 1 April. He withdrew ₹40,000 permanently out of capital on 1 October. Calculate his Interest on Capital (IOC) @ 10% p.a. for the financial year ending 31 March.
Explanation:
Calculate interest based on the periods the specific capital amounts were utilized by the firm:
Capital for April–September (first 6 months) = ₹2,00,000.
Capital for October–March (last 6 months) = ₹2,00,000 − ₹40,000 = ₹1,60,000.
IOC = +
IOC = ₹10,000 + ₹8,000 = ₹18,000.
Q5 (MCQ): A partner draws ₹4,000 per month at the beginning of each month. The rate of interest on drawings is 10% p.a. The total interest on drawings for the year is:
A) ₹2,400
B) ₹2,600
C) ₹2,200
D) ₹2,000
Answer: B) ₹2,600.
Explanation:
Total yearly drawings = ₹4,000 × 12 = ₹48,000.
When equal amounts are drawn at the beginning of every month for a full year, the average period is calculated as:
.
IOD = Total Drawings × Rate ×
IOD = ₹48,000 × × = ₹4,800 × = ₹2,600.
Q6 (MCQ): Which of the following is the correct formula for calculating commission when it is based on net profit before charging such commission?
A) Profit × Rate / (100 + Rate)
B) Profit × Rate / 100
C) Profit / (100 + Rate) × 100
D) Profit × (100 + Rate) / Rate
Answer: B) Profit × Rate / 100.
Explanation: "Before charging" means the commission is simply a direct mathematical percentage of the given unadjusted profit figure, requiring no special back-calculation. Therefore, the standard percentage formula (Profit × Rate / 100) applies. The formula in option A is strictly used when the problem specifies "after charging such commission."
