Accounting Treatment of Partner Loans
Loans given by partners are recorded separately from their capital accounts in the firm’s books.

• Credited to a “Partner’s Loan Account”, not the capital account
  
• Reflected as a liability in the firm’s balance sheet
  
• Repaid with or without interest based on the agreement
  
• Treated like any other creditor loan for accounting purposes
  
• Can be long-term or short-term, as per mutual consent
  

Difference Between Capital and Loan
It’s important to distinguish between capital contribution and a loan from a partner.

• Capital is the ownership contribution and part of the firm’s equity
  
• The loan is a repayable debt, not part of ownership
  
• Loans may or may not bear interest, depending on the partnership deed
  
• Loans do not entitle the partner to an extra profit share
  
• Loan repayment usually takes priority over the return of capital during dissolution
  

Repayment and Interest Provisions
The repayment of partner loans must follow the terms mentioned in the deed or a separate agreement.

• May carry a fixed rate of interest (e.g., 6% p.a.), if agreed
  
• Repayment timing and conditions must be clearly defined
  
• Interest paid is generally allowed as a deductible expense for the firm
  
• No TDS is applicable on interest paid to a partner (if the partnership is assessed as a firm)
  
• Loan repayment must not affect the firm’s ability to pay external creditors
  

Treatment in Case of Dissolution
In the event of dissolution, loans from partners are repaid before returning capital but after external debts.

• Priority is: external creditors → partner loans → partner capital
  
• If firm’s assets are insufficient, partners may recover only a portion
  
• Disputes over loan repayment should be resolved per the deed or legal process
  
• The distinction ensures fair settlement of liabilities and capital during winding up
  
• Creditors have superior legal rights over partner loans
  

Regulatory and Legal Recognition
Loans from partners are recognized legally but must comply with tax, audit, and FEMA rules (if the foreign partner is involved).

• Proper documentation and agreement are recommended for transparency
  
• Shown under liabilities in audited financial statements
  
• Not classified as external debt for creditworthiness assessments
  
• Must not be disguised capital or profit-sharing arrangements
  
• Can be subject to scrutiny during income tax assessments