CBSE Class 12-commerce Answered
How to pass the entry
Under fixed capital method interest on capital is
Asked by raju_salgaonkar | 19 Jan, 2020, 08:20: PM
Expert Answer
Important provisions relating to Interest on Capital:
- If there is no Partnership Deed or there is no clause in the deed as to interest on capital: Interest on Capital is not allowed.
- If the Partnership Deed provides for interest on capital but is silent as to the treatment of interest as a charge or appropriation: Interest on capital is treated as appropriation of profit. Such interest is payable only if the firm is making profits. Following are possible situations:
- In case of loss: No interest is allowed.
- In case of profit, where profit before interest is equal to or more than the interest: Interest is allowed at the agreed rate.
- In case of profit, where profit before interest is less than the interest: Interest is allowed only to the extent of profit in the ratio of interest on capital of each partner.
- If the Partnership Deed provides for interest as a charge (i.e., to be allowed whether there are profits or loss): Interest on capital is allowed whether there is profit or loss.
Journal Entries for recording Interest on Capital:
In case of Fixed Capital Accounts:
Interest on Capital A/c …Dr.
To Partners’ Current A/cs
(Being the interest on capital allowed to partners)
Profit and Loss Appropriation A/c …Dr.
To Interest on Capital A/cs
(Being the interest on capital transferred to Profit and Loss Appropriation Account)
Alternatively: only one entry can be passed in place of above 2 entries as follows:
Profit and Loss Appropriation A/c …Dr.
To Partners’ Current A/c
(Being the interest on capital allowed to partners)
Answered by Surabhi Gawade | 20 Jan, 2020, 10:52: AM
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