Converting loan account to capital account for a partnership firm

Converting loan account to capital account for a partnership firm

Dear Sir / Mam ,

We have inadvertently in the previous years balance sheet , shown loan account for partner which actually was capital account . No interest has been accrued in previous years. Our balance sheets of previous years are already audited . We would now like to set it right by transferring loan account into capital account .

Kindly suggest , if for a partnership firm,
1.)loan account of partners can be fully or partly converted into capital account ? This transfer can be reflected in two different financial years.
2.) Any board meeting or resolution needs to be passed to bring this change or any modifications to be made in partnership deed etc.

Regards

NK Gupta
Delhi/Mumbai

Asked 5 years ago in Income Tax

Yes you can easily transfer loan account to capital account it is not such a big matter.

Because auditor always mentions that the account in balance sheet and profit and loss are regrouped and rearranged for better presentation so if last year there was a mistake in presentation you can easily fix it there is nothing to worry and any which ways it's partners loan account you can easily transfer it to capital account.

You are not running a company you are running a partnership firm so no need to have any meeting or anything for such thing. Why would there be a modification in partnership deed for just one accounting entry.

Hope you find the information helpful if you do please rate it 5 and provide your valuable feedback for my improvement.

Thank you

Naman Maloo

CA, Jaipur

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Yes Mr Gupta, you can convert last year's loan into capital in the current year.

No resolution is required. Just need to pass an entry to increase the capital of the partner. It will be treated as new capital introduction by the partners