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__Interest on Capital__
Interest on capital is an amount at an agreed rate of
interest which is credited to a partner based on the amount of capital
contributed Interest on capital
of partners is calculated for relevant period for which the amount of capital
has been used in business. Capital introduced or withdrawn by a partner during
the year has to be taken for the purpose of calculation of interest. The
following are the points in relation to interest on a partner’s capital:

In case the profit is
less than the interest on capital, the profit will be distributed in ratio of
capital contributed by each partner..

Interest on capital
is a charge on the profits of a firm and it decreases the net available profit
for appropriation. Therefore, it is debited to the P&L account to recognise
as an expense (and a charge on the profits).

Interest is payable
to the partners and hence, the partner’s capital is credited with the amount
of interest.

In case of loss, no interest is allowed on capital.

If the partner
agreement is silent regarding payment of
interest on capital then no interest will be allowed to partners

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