Interest on Capital :

In order to see whether the business is really earning profit or not, it is desirable to charge interest on capital at a certain rate.

Example: As per Trial Balance, capital as on 31.3.2004 is Rs.4,00,000. Adjustment: Provide 6% interest on capital.

Adjusting Entry

Date	Particulars	L.F	Debit Rs.	Credit Rs.
2004
31-Mar	Interest on capital A/c                                                                                                     Dr		24,000
	To Capital A/c			24,000
	(6% interest on capital)

 

To bring interest on capital to Profit and Loss account, the following transfer entry is required.

Transfer Entry

Date	Particulars	L.F	Debit           Rs.	Credit Rs.
2004
31-Mar	Profit & Loss A/c                                                                                                                           Dr		24,000
	To Interest on Capital A/c			24,000
	(Interest on capital transferred to Profit & Loss A/c)

 

Interest on capital will be shown

i) on the debit side of Profit and Loss account and

ii) on the liabilities side of the Balance Sheet by way of addition to the capital.

Profit & Loss Account
for the year ending 31st March, 2004
Dr.                                                                                                                                                                                                                                                  Cr.

Particulars	Rs.	Particulars	Rs.
To Interest on Capital A/c	24,000

 

Balance Sheet as on March 31, 2004

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
Capital	4,00,000
Add: Interest on capital	24,000
		4,24,000