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karnataka class 12 commerce Accountancy Interest on partners capitals


karnataka class 12 commerce Accountancy Interest on partners capitals

karnataka class 12 commerce Accountancy Interest on partners capitals :- we will provide complete details of karnataka class 12 commerce Accountancy Interest on partners capitals in this article.

karnataka class 12 commerce Accountancy Interest on partners capitals

INTEREST ON CAPITAL OF PARTNERS

karnataka class 12 commerce Accountancy Interest on partners capitals

In a partnership firm, the partners invest the amount as capital as per partnership deed. According the partnership deed they may have the clause of interest to be paid by the partnership firm on the capital employed by the individual partners. This clause is very much useful in case where the different amounts are invested by the partners.  To avoid any differences among the partners in respect of investment made by them, a certain percentage of interest is paid to them on their capital employed as agreed upon.

karnataka class 12 commerce Accountancy Interest on partners capitals:-Treatment of Interest on Capital of Partners in Final Accounts

Interest on partner’s capital account is indirect expenses for a partnership firm and is shown in expenses side of the profit and loss account. Unpaid interest in being shown as interest payable or outstanding expenses or expenses payable in liabilities side of balance sheet. Some time the interest amount is credited to the capital account of the partners, if not to be paid during current financial year.

karnataka class 12 commerce Accountancy Interest on partners capitals

Interest on capital Almost always, interest on capital will be paid on partners’ capital balances only – although the balances on the current accounts are actually part of the total capital balance, it is normal to exclude them from the value of capital on which interest is paid. Paying interest on capital is a means of rewarding partners for investing funds in the partnership as opposed to alternative investments. As such, it reduces the amount of profit available for sharing in the profit and loss sharing ratio. This means that a debit entry is needed in the Appropriation Account. The double entry is completed by a credit entry in the current account of the partner to whom the salary is paid.

karnataka class 12 commerce Accountancy Interest on partners capitals

Interest on capital is allowable only if there is enough profits to cover it up otherwise not as well as it should be cleared to all that partners shall not be entitled any interest on capital, unless specifically given or written in the partnership agreement. Interest on capital introduced by the partners is calculated on the basis of time of contribution and it should also be considered the introduction of fresh capital by any partner as well as drawings made by the partners. It is important to note here that, the interest on capital provided to a partner is a compensation given to him for his/her investment in the firm foregoing the alternative risk free/risky investment available with even higher return. Interest on capital is necessary to partners because they always not share the profit on the basis of capital contribution ratio rather sometime equally even through the capital contribution is unequal. So, it equalizes the weight to maintain a parity the interest on capital plays a vital role among partners.

karnataka class 12 commerce Accountancy Interest on partners capitals:-Accounting Treatment of Interest on Partner’s Capital Account

a) In case of interest paid in cash or by cheque:-

Type of voucher to be prepared:-   Cash or Bank payment voucher

Entry to be made

Debit:-  Interest on Partner’s Capital Account

Credit:-  Cash Account or Bank Account

b) In case of unpaid interest:-

Type of voucher to be prepared:- Journal voucher

Entry to be made

Debit:-    Interest on Partner’s Capital Account

Credit:-  Interest Payable Account

or

Outstanding Expenses Account

or

Expenses Payable Account

or

Partner’s Capital Account

karnataka class 12 commerce Accountancy Interest on partners capitals

When  rate of interest will be as agreed upon by the partners. Interest is charged on the opening balance of the partner’s capital account. When additional capital is introduced and some capital is withdrawn permanently, the interest will be calculated on the amount of the capital used in the business during a particular period. Interest is treated as an expense as it is a charge on the profits of the firm. The following journal entry will be made :

For Interest on Capital

Interest on Capital A/c Dr.

To Partner’s Capital A/c

(Being Crediting ‘Interest on Capital’ to Capital Account)

Interest can be calculated directly  example  simple interest is to be calculated by taking the principal amount, period and rate of interest or interest can be calculated by product method  example by converting the principal amount into monthly products depending upon number of months for which principal amount remained in business. Then the interest is calculated by taking monthly rate of interest. The following example will illustrate both the methods of calculating interest on capital.

karnataka class 12 commerce Accountancy Interest on partners capitals

Illustration 1

Ram and Shyam are partners with a capital of  1,00,000 and 1,60,000 on January 1,2016 respectively. Ram introduced additional capital of ` 30,000 on July 1, 2016 and another ` 20,000 on October 31,2016. Calculate interest on capital for the year ending 2016. The rate of interest is 9% p.a.

Solution:

Interest on Capital (Ram):

On  1,00,000 for 12 month @ 9% = 1,00,000 × 9/100 × 12/12

= 9,000

On  30,000 for 6 month @ 9% = 30,000 × 9/100 × 6/12

=  1,350

On  20,000 for 2 month @ 9% = 20,000 × 9/100 × 2/12

= 300

Total interest on Ram’s capital =  9,000 +  1350 +  300

= 10,650
Interest on Capital (Shyam):

On 1,60,000 for 12 month @ 9% = 1,60,000 × 9/100 × 12/12

= 14,400

Interest on capital by product method

AmountMonthProduct
100000121200000
300006180000
20000240000
1420000

By product method : = 1,60,000 × 12 = 19,20,000

= 14,20,000 x 9 x 1
100 12

=  14,400

karnataka class 12 commerce Accountancy Interest on partners capitals

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karnataka class 12 commerce Accountancy Interest on partners capitals

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