Loading....
Coupon Accepted Successfully!

 

Interest on Capital


Funds invested by a proprietor to the business constitute the 'capital'. Like other borrowings/loans, interest can be paid on the proprietor's funds/capital also. Suppose, the capital is Rs. 40,000 and the rate of interest is 5%. Then the interest will be Rs. 2, 000. It is treated like any other expense and is debited to the Profit and Loss Account and credited to the capital Account. Adjustment entries for charging interest on capital are:
 
Interest on Capital A/c Dr. Rs. 2,000
To Capital A/c Rs. 2,000
 
Profit and Loss A/c Dr. Rs. 2,000
To Interest on Capital A/c Rs. 2,000
 
In the Final Accounts, it appears as follows:

 

Profit and Loss Account

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Interest on Capital

2,000

   

 

Balance Sheet as at 31st March 2008

Liabilities

Rs.

Assets

Rs.

Capital          40,000

Add: Interest   2,000

                     --------

 

 


42,000

 

 

 





Test Your Skills Now!
Take a Quiz now
Reviewer Name