where is interest on capital shown in financial statements
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Interest On Capital :
According to the Business entity Assumption, A business is an entity distinct and separate from its owners. The Amount invested by the owner within the business is known as Capital and it is treated as a liability to the firm
Suppose, if this amount has been invested outside the business, some income in the form of Interest would have been earned by the Businessman, So, it offset the loss of Interest suffered by the Businessman, interest is allowed to him on the Capital introduced by him in the business. This Amount is not given in cash, but credited to his capital account.
Since, Interest on Capital is an Expense for the business, So Interest on Capital account is debited and it is profit for the owner which would increase his capital,So Capital account is credited.
Adjustment Entry :
Interest On Capital A/c.(Amount) To Capital A/c. (Amount) (Being Interest on Capital Allowed)
Adjustment enteries are made at the end of an Accounting period after closing the books of accounts and preparing Trial balance.
Treatment in Final Accounts :
1. Interest on Capital is an Expense for the business and hence it is shown on the debit side of profit and loss Account.
2. At the same time, it is a gain to the proprietor and hence is added to his capital.
According to the Business entity Assumption, A business is an entity distinct and separate from its owners. The Amount invested by the owner within the business is known as Capital and it is treated as a liability to the firm
Suppose, if this amount has been invested outside the business, some income in the form of Interest would have been earned by the Businessman, So, it offset the loss of Interest suffered by the Businessman, interest is allowed to him on the Capital introduced by him in the business. This Amount is not given in cash, but credited to his capital account.
Since, Interest on Capital is an Expense for the business, So Interest on Capital account is debited and it is profit for the owner which would increase his capital,So Capital account is credited.
Adjustment Entry :
Interest On Capital A/c.(Amount) To Capital A/c. (Amount) (Being Interest on Capital Allowed)
Adjustment enteries are made at the end of an Accounting period after closing the books of accounts and preparing Trial balance.
Treatment in Final Accounts :
1. Interest on Capital is an Expense for the business and hence it is shown on the debit side of profit and loss Account.
2. At the same time, it is a gain to the proprietor and hence is added to his capital.
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