Question

Preparation of accounting equations from the following transactions prepare an accounting equation
1) Mr Faisal started a business with cash 20,000Rs
2) he took bank loan rupees 100000
3) he purchased goods for rupees 15000
4) he sold 50 % of goods at a profit of 20% on cost
5) he sold 10% of the remaining goods at a profit of 10 %
6) allowed interest on capital rupees 1000
I want my point no.6 to be cleared as in my book it's adding rs 1000 on capital column and also deducting it from capital

Answer 1

Answer:

It is a normal practice to charge business with interest on capital. Profits left after charging the amount of such interest are the real profits earned by the business. Such interest is a loss from the point of view of business and therefore according to the rule of nominal account Interest A/c is debited in Journal entry and it is a gain for proprietor His capital is increased by the amount of interest and therefore the capital account is credited in the journal entry

That's why in accounting equation interest on capital's entry is first adding the interst in capital and subtracting it from capital again

Hope it will help you!

Thank you!