Sometimes the partnership agreement may specify that interest is to be charged on partner's drawings. Which of the following is the main reason for such a charge?
A) To reduce partnership profits.
B) To act as a disincentive to partners withdrawing excessive amounts from the partnership.
C) To increase the income of the partnership.
D) To encourage partner's to draw extra amounts.

Question

Quizplus · Accepted Answer

Charging interest on partner's drawings acts as a disincentive to partners withdrawing excessive amounts from the partnership, as it increases the cost of the withdrawal. This helps to preserve the cash reserves of the partnership and encourages partners to only withdraw what is necessary for their personal use, thereby ensuring the long-term sustainability of the partnership. Charging interest on drawings does not reduce partnership profits, as it is not a direct expense of the partnership, nor does it increase the income of the partnership. It also does not encourage partners to draw extra amounts, as they will have to pay interest on any excess withdrawals.

Sometimes the Partnership Agreement May Specify That Interest Is to Be