Question

Interest on capital of partner is a _________.

• A. Loss to business
• B. Profit to business
• C. Loss to partners
• D. Loss to tax department

Answer 1

The correct option is A Loss to business

Interest on Capital in Partnership Accounts

When rate of interest will be as agreed upon by the partners. Interest is charged on the opening balance of the partner’s capital account. When additional capital is introduced and some capital is withdrawn permanently, the interest will be calculated on the amount of the capital used in the business during a particular period. Interest is treated as an expense, as it is a charge on the profits of the firm. The following journal entry will be made :

For Interest on Capital

Interest on Capital A/c Dr.

To Partner’s Capital A/c

(Being Crediting ‘Interest on Capital’ to Capital Account)