Accounting is one of the most critical subjects in trade and commerce. Without the proper knowledge of accounting, you cannot be a successful accountant or a trader. There are certain terms related to accounting a student of accounting should know, and you should come across this terminology with the help of proper guidance. One of such important terminology is ‘Interest of Capital.’ Interest on capital homework answers help will guide you in detail about the subject.
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What do you mean by interest on capital?
The funds invested by the proprietor to his/ her business is called the ‘capital.’ Like other loans or borrowings,interest should be paid on that capital which is known as interest on capital. This is a kind of expense and is debited to the debited to the Profit & Loss and credited to the capital account. Interest on capital is calculated for a particular period of which the capital is invested in the business.
The main problem on how to calculate the interest on capital, the interest on capital homework answers assignment help will help you a lot.
A basic example of the interest on capital:
Suppose you have started a business with a capital of Rs. 40,000 and the rate of interest are 5%, then the total amount of interest will be (40,000×5)/100=Rs. 2000. However, the adjustment entries for this amount will be like this—
Interest on capital account=Dr. Rs. 2000
To capital account=Rs. 2000
Profit and Loss account=Dr. Rs. 2000
To interest on capital account= Rs. 2000
In this way, you can easily enter the interest on capital in your account book.
Important points in relation to interest on capital:
There are certain things to remember in relation to interest on capital. These are—
- Interest on capital is a kind of expense of the business concern and is deducted from the profit and loss account.
- As interest in a payable matter to the partner, the capital of the partner is credited with the amount of the interest.
- When there is a loss in the business, no interest should be allowed on the capital amount.
- In the case of profit, this profit will be distributed in the ratio of capital invested by each partner.
What is Capital?
Capital is the amount that forms the different business activities. It is the liabilities for any business. The amount of capital that the proprietor borrowed for his/her business is subject to a certain amount of interest which the proprietor has to be paid.
The interest rate is certainly an expense for the business. So, it can be debited to profit and loss account. In order to maintain proper balance, it is necessary to add the capital on the liability side.
Entries of Capital:
As capital is debited, it is considered as an expense and enter on the debit side of the profit and loss account.But at the same time, as the capital account is credited in the journal entries, it would increase when the amount of interest on capital at liability side increases.
But when we enter the interest on capital on Trial Balance side, it will be entered on the debit side of the P & L A/C. When a student fails to understand when the entry will be properly, interest on capital homework answers will guide him/her properly.
Where interest is practically allowed on capital:
Interest is always allowed to the partner, and it depends on the capital that the partner has contributed to the business. In this case, the interest on capital is calculated for a particular period for which that capital is used for the business operation.
The particular amount of capital that is withdrawn or invested by the partner in a particular accounting year must be used for calculation purpose. So, interested is practically allowed on partner’s capital. How the interest on capital is to be calculated is mentioned in the interest on capital homework answers help.
What are main purposes of finding the interest on capital?
Interest on capital is a division of a part of the profit in capital ratio. It is justified in below-mentioned cases:
- If the partner’s share is equal to the profits, but it is unequal to the capital with a smaller amount of capital that would gain at the expenses of the others.
- In that case where the partner has equal capital, but the share profits are not equal. The partners who get more profits, get more advantages than that of the partners who make fewer profits.
Interest on capital homework answers help makes the idea of interest on capital easy, and when a student of accounting take the advantages of this assignment, he/she gets ample of ideas on this subject which make calculating of interest on capital easy.