why interest on capital is charged on opening balance of capital?
Shelton,
Interest on Capital is paid for the reason that proprietor has invested funds in the business and the business is using the funds to sustain. Accordingly, interest on capital is paid on the balance in partner's capital account. And as we know this balance in capital account keeps on fluctuating throughout the year due to number of appropriations that are made during the year that may be related to salary, commission, etc. This difficulty to assess the exact amount of capital due for interest payment, it is one of the convention followed in accounting that payment of interest on capital is made on the opening balance on the assumption that this amount has been used or employed in the business for full accounting period and all the adjustments have been done at the end of period (withdrawal/introduction of capital). However, if evident information is available related to amount invested a business may allow charging interest on capital on changing balances.
Interest on Capital is paid for the reason that proprietor has invested funds in the business and the business is using the funds to sustain. Accordingly, interest on capital is paid on the balance in partner's capital account. And as we know this balance in capital account keeps on fluctuating throughout the year due to number of appropriations that are made during the year that may be related to salary, commission, etc. This difficulty to assess the exact amount of capital due for interest payment, it is one of the convention followed in accounting that payment of interest on capital is made on the opening balance on the assumption that this amount has been used or employed in the business for full accounting period and all the adjustments have been done at the end of period (withdrawal/introduction of capital). However, if evident information is available related to amount invested a business may allow charging interest on capital on changing balances.