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Providing Interest on Capital

Why is Intere...

Question

Why is Interest on Capital allowed by the firm to its partners, when the firm already given share in firm’s profit to partners ?

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Solution

Dear student Intrest on capital is provided by a firm to a partner because paying intrest on capital is rewarding partner for investing fund in partnership as opposed to alternative investment. It reduce the amount of profit available for sharing in profit and loss sharing ratio. Regards

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