Why is Interest on Capital allowed by the firm to its partners, when the firm already given share in firm’s profit to partners ? (class 12 question) explain briefly and no spams please its for my exam.
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Paying interest on capital is a means of rewarding partners for investing funds in the partnership as opposed to alternative investments. As such, it reduces the amount of profit available for sharing in the profit and loss sharing ratio. This means that a debit entry is needed in the Appropriation Account.
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