Question

Interest on capital shown in the

Answer 1

ANSWER :

★ Profit and Loss Appropriation Account

• ➲ Interest on capital is shown in the Profit and Loss Appropriation Account.

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EXPLANATION :

❒ Interest on Capital :-

• ✎ Interest on capital is the amount which is paid to the partners of a firm for contributing capital to it. Though the Indian Partnership Act, 1932 does not lay down any provision for allowing interest on partners' capital; however if the partners agreed in the partnership deed, the same may be allowed.

• ✎ According to Section 13(c) of the Partnership Act, where interest on capital is payable; it can be paid only out of profit. So, when the business has resulted into a loss, no interest on profit will be allowed even if there is a provision for the same in the partnership deed.

• ✎ Where the partners of a firm agree that interest will be allowed on the capitals at an agreed rate; before ascertaining the amount of divisible profit, the amount of interest on capital is deducted from the divisible profit before distributing the amount in their profit sharing ratio.

• ✎ Interest paid on capital is debited to Profit and Loss Appropriation Account as it is a part of appropriation of profit. Again, the respective accounts of the partners are credited it is gain for them.