Question

Interest on capital is ________ on business.

• A. expense
• B. loss
• C. profit
• D. income

Answer 1

Answer: (A)

expense

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 is brought into business.

Such interest is treated as expense for the business and the following entry is recorded in the books of account:

Interest on Capital A/c Dr.

To Capital A/c