Interest on Capital .

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 Capital introduced or withdrawn by a partner during the year has to be taken for the purpose of calculation of interest.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