allowed interest on capital rupees 5000 will be credited by
Answers
Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as and expense for the business and the following journal entry is recorded in the books of account:
Interest on Capital A/c Dr.
To Capital A/c
If the opening capital is Rs. 50,000 as on April 01, 2005 and additional capital of Rs. 10,000 on January 01, 2006. The interest charge on capital is 10% p.a. The amount of interest on capital shown in profit and loss account on March 31, 2005 will be:
Interest on Opening capital = Rs. 50,000 X 10/100
= Rs. 5,000
Interest on Additional capital = Rs. 10,000 X 10/100 X 3/12
= Rs. 250
Therefore, total amount of interest on capital = Rs. 5,000 + Rs. 250
= Rs. 5,250