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Interest on capital is the amount paid/payable on the additional capital to the partner.
For Example:
A,B and C are equal partners with capital contribution of $10,000 each.B provides additional capital of $50,000 and all the partners agreed that interest on this amount to be paid to B (lets say @10%).So the amount of $5,000 needs to be paid to B for additional capital of $50,000.
It's same as loan but the presentation is different as it is provided by Partner.
In Accounting,Interest on capital is treated as Expenses and and added to the partner capital.
Journal Entry.
DR Interest Expenses $5,000
CR Partner A/c B $5,000
Or CR Cash if paid already.
Interest on capital is an appropriation (setting apart) of profit. If a firm has earned profit, it will have a credit balance in the P & L Appropriation A/c. So if you have to take a part from profit and put in the partners' capital accounts, you will have to debit (reduce) P & L Appropriation A/c and credit (increase) partners' capital accounts. It can be done directly or through Interest on Capital A/c.
is an expense to the firm and is debited to the profit and loss appropriation account. Interest is payable to the partners and hence, the partner's capital account is credited with the amount of interest.
Interest is the amount of money which you gave to the lender on the money which you have borrowed from him after a specific period of time.
it is the to planing to the gools
Interest on capital can simply be explained as the amount received by an owner of capital in addition to his principal for investing in a particular opportunity.
The interest on capital can also be looked at from the angle of being a compensation to the owner of capital for taking an investment decision.
which ever way we choose to look at it, the interest should adequately put into consideration, the risk taken by the investor, the period for which he would be denied access to his fund and opportunity cost of taking that particular investment.
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