Technically speaking, capital is that amount which forms the base on which various business activities can be conducted. However, being the claim of the proprietor, it can be taken as a liability for the business.
For any business, the capital that is borrowed from proprietor’s is taken as an amount on which a certain rate of interest is to be paid. This interest rate is termed as an expense for that particular firm or company. So, it can be said to be debited to profit and loss account interest on capital and will on an extension increase balance of proprietor’s capital as well.
To maintain a balance it also needs to be added on to the capital account on liabilities side.
Since it is debited as an expense, hence it is taken on debit side of profit and loss account. While at the same time capital account has been credited in journal entry hence, capital would increase with amount of interest on capital at Liabilities side.
When interest on capital is taken on Trial Balance side, it will be taken into account on debit side of profit and loss account.
A detailed understanding of this is important to ensure that students can easily place their points in a detailed manner.
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