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 |