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.
Calculation of Interest on Capital
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.
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
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.