Interest on Capital
Interest on Capital means when the proprietor renders money to the firm for running the business, in turn, the firm provides interest on capital to the proprietor. The rate of interest shall be pre-determined on the basis of the time period. For example, if the proprietor has lent an amount at the beginning of the given period, he shall receive an interest on capital for the whole period and if it is lent between the year then the rate of interest on capital shall be calculated accordingly in the proportion of time.
Adjustment:
A. If Interest on Capital is given outside the trial balance:
In such case, two effects will take place –
- Interest on Capital will be shown on the debit side of the Profit & Loss A/c, being an item of expense for a business.
- It will be added to the Capital A/c in the Liabilities side of the Balance Sheet.
B. If Interest on Capital is given inside the trial balance:
In such a case, Interest on Capital will be shown only in the Dr. side of the Profit & Loss A/c, being an expense for a business.
Financial Statement with Adjustment with Examples-II
Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year, but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Five adjustments such as Interest on Capital, Interest on Drawings, Interest on Deposits, Interest on Loans, and Proprietor’s Salary are discussed below: