Question

Interest on capital is added to______.

• A. profit
• B. cash
• C. capital
• D. interest

Answer 1

The correct option is C capital

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as an expense for the business and the following entry is recorded in the books of accounts:

Interest on Capital A/c Dr.

To Capital A/c

In the final accounts, it is shown as an expense on the debit side of profit and loss account and added to capital in the balance sheet.