Question - What will be accounting equation for ' Interest on Capital at 10% '

Capital = 2,39,200

Hey,

The accounting equation for interest on capital is as shown below.
 
S. No. Transaction Assets = Liabilities + Capital
Cash + Bank + Stock = Creditors + Outstanding Rent    
(i) Interest on Capital @ 10%                     +23,920
-23,920
                        XXX

Calculation of Interest on Capital

2,39,200×10100= Rs 23,920

Here, interest is added to and deducted from capital, so the net effect is nil. This is because of the following two reasons:

1. Interest on capital being an income for the proprietor is added to the capital
2. Interest on capital being an expense for the business is deducted from the capital

The same is the case for interest on drawings. Hope, this has clarified your concepts.

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