Journal Entry for Interest on Capital

The proprietor can charge interest on the amount invested by him/her in the business as capital, which is shown as Interest on Capital. Interest on Capital Journal Entry recognizes the interest expense incurred by the partnership for using the partner’s capital. Interest on Capital A/c (Expense) is debited in this case and Capital A/c of the respective partner is credited (increased) by the interest amount. The interest expense is then distributed among the partners according to their profit-sharing ratios.

Example 1: Interest is charged ₹800 on capital.

Solution:

Journal Entry

 

Example 2:

1. Started business with Cash ₹1,00,000.
2. Charged Interest on Capital @6% per annum.

Solution:

Journal Entry