Question

State whether the following statement is True or False.
The interest on capital is an income of the firm.

• A. True
• B. False

Answer 1

The correct option is B False

Interest on capital is paid by the firm on the partners capital. The firm uses the capital and thus, pays interest on it. As the firm pays the amount of interest it is evident that it is an expense and not the income of the firm. The firm has to pay interest @ 6% p.a. to the partners in the absence of any agreement. The journal entry is:

Interest on Capital A/c.............Dr.

To Partner's Capital A/c

(Being interest on capital due to the partners).