Success Roar Classes

# Interest on Capital

## What is Interest on capital?

The interest on capital is allowed(given) by the firm to the partners for contributing the capital introduced by the partners in the firm. So, it is-

“INTEREST”  On  “CAPITAL”

## What are the features of Interest on capital?

1. Nature of Interest on capital– It is an appropriation of profit. Hence it is to be shown in the Profit and Loss appropriation account.
2. Income for the partner- Interest on capital is an appropriation (expense) for the firm and income for the partner. Hence it is debited to the Profit and Loss Appropriation account and credited to the partner’s capital account i.e. increase in partner’s capital.

3. It is allowed as per the partnership deed. If nothing is given in the partnership deed or there is no partnership deed, no interest will be allowed to the partners. (Indian partnership Act,1932)

4. Entry for Interest on capital

## How to calculate Interest on capital?

Amount of Opening capital x Rate/100 x Time/12

1. Amount- Interest on capital is always calculated on the opening capital balance.
2. Rate of Interest- It is the rate agreed among the partners. In the absence of any agreement, no interest on capital will be allowed to partners. In case of the absence of p.a. word, interest will be calculated for the whole year.
3. Time- The interest will be calculated on the basis of time factor. The Interest will be calculated from-
• For Opening Capital – from first day of the year (1st April) till the end of the accounting year.
• For additional capital- from the date of contribution till the end of the accounting year.

## How to calculate Opening capital?

#### When capitals are Fluctuating

*Either loss or profit will appear at a time.

** Alternatively opening capital balance can be calculated by preparing partner’s capital account.

## Interest on capital in different Cases

Note:

1. Appropriation of Profit-
1. This is distribution of profit hence It is to be allowed only in case of profit.
2. Charge-
1. It indicates expenses to be deducted from profits even if firm there is a loss.