Question

How we can calculate the amount of capital with given additional capital loss withdrawn?

Answer 1

When  rate of interest will be as agreed upon by the partners. Interest is charged on the opening balance of the partner’s capital account. When additional capital is introduced and some capital is withdrawn permanently, the interest will be calculated on the amount of the capital used in the business during a particular period. Interest is treated as an expense as it is a charge on the profits of the firm. The following journal entry will be made :

For Interest on Capital

Interest on Capital A/c Dr.

To Partner’s Capital A/c

(Being Crediting ‘Interest on Capital’ to Capital Account)

Interest can be calculated directly  example  simple interest is to be calculated by taking the principal amount, period and rate of interest or interest can be calculated by product method  example by converting the principal amount into monthly products depending upon number of months for which principal amount remained in business. Then the interest is calculated by taking monthly rate of interest. The following example will illustrate both the methods of calculating interest on capital.

Illustration 2

Ram and Shyam are partners with a capital of  1,00,000 and 1,60,000 on January 1,2016 respectively. Ram introduced additional capital of ` 30,000 on July 1, 2016 and another ` 20,000 on October 31,2016. Calculate interest on capital for the year ending 2016. The rate of interest is 9% p.a.

Solution:

Interest on Capital (Ram):

On  1,00,000 for 12 month @ 9% = 1,00,000 × 9/100 × 12/12

= 9,000

On  30,000 for 6 month @ 9% = 30,000 × 9/100 × 6/12

=  1,350

On  20,000 for 2 month @ 9% = 20,000 × 9/100 × 2/12

= 300

Total interest on Ram’s capital =  9,000 +  1350 +  300

= 10,650