Question

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

[0.88 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 D Dr. Interest on Capital A/c and Cr. Partners’ Current A/c

Under the fixed capital account method, all the transactions of a recurring nature occurring between partners and firms are recorded in partners' current accounts.
Interest on capital is an expense for the firm, so it is debited. It is an income for partners and is credited to their current accounts.