Question

Which of the following is the journal entry for transferring interest on capital to a partner under a fluctuating capital account method?

[2 marks]

• A. Dr. Interest on Capital A/c and Cr. Profit and Loss Appropriation A/c
• B. Dr. Profit and Loss Appropriation A/c and Cr. Interest on Capital A/c
• C. Dr. Interest on Capital A/c and Cr. Partners’ Capital A/c
• D. Dr. Interest on Capital A/c and Cr. Partners’ Current A/c

Answer 1

The correct option is C Dr. Interest on Capital A/c and Cr. Partners’ Capital A/c

Under fluctuating capital account method, all the transactions occurring between partner and firm are recorded in partners’ capital account.

Interest on capital is an expense for the firm so it is debited and it is an income for partners, so its partners' capital account is credited.