Question

Where a partner is entitled to interest on the capital subscribed, such interest is payable

(a) out of profits only
(b) out of capital if no profits
(c) out of capital if losses
(d) either (a) or (b) or (c)

Answer 1

Interest on capital invested by partners in a business is payable out of profits only, and not from capital or in the event of losses, to protect the financial stability of the company. The correct answer is option (a).

Step-by-step explanation:

When it comes to whether a partner in a business is entitled to interest on the capital they have invested, such interest is typically payable out of profits only. This means that if a business does not have any profits, it would generally not pay interest on the capital to the partners. This concept is aligned with responsible financial practices, where companies prioritize the use of profits over capital to ensure they do not diminish the business's resources.

For instance, a small company that is earning little to no profits would focus on reinvesting any earnings it has back into the business for future growth, rather than paying interest out of their capital. Similarly, venture capitalists, who invest in these small but growing firms, are often more involved with the management and strategy, understanding the importance of using profits wisely to ensure the long-term sustainability of the company.