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Home | | Accountancy 12th Std | Calculation of interest

on capital

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Accounts of Partnership Firms Fundamentals | Accountancy - Calculation

of interest on capital | 12th Accountancy : Chapter 3 : Accounts of Partnership

Firms Fundamentals

Chapter: 12th Accountancy : Chapter 3 :

Accounts of Partnership Firms
Fundamentals

Calculation of interest on
capital

Interest on capital is to be calculated on the capitals at

the beginning for the relevant period.

Calculation of interest on capital

Interest on capital is to be calculated on the

capitals at the beginning for the relevant
period. If there is any additional capital
introduced or capital withdrawn during the
year, it will cause change in the capitals and
interest is to be calculated proportionately on
the changed capitals for the relevant period.

Interest on capital = Amount of capital x

Rate of interest per annum x Period of
interest

Tutorial note: If capital at the beginning is

not given, then it can be calculated as below:

Illustration 5

Mannan and Ramesh share profits and losses

in the ratio of 3:1. The capital on 1st April
2017 was ₹ 80,000 for Mannan and ₹ 60,000
for Ramesh and their current accounts show
a credit balance of ₹ 10,000 and ₹ 5,000
respectively. Calculate interest on capital at
5% p.a. for the year ending 31st March 2018
and show the journal entries.

Solution

Calculation of interest on capital:

Interest on capital = Amount of capital x

Rate of interest

Interest on Mannan’s capital = 80,000 x

5/100 = ₹ 4,000

Interest on Ramesh’s capital = 60,000 x

5/100 = ₹ 3,000

Note: Balance of current account will not be

considered for calculation of interest on
capital.

Illustration 6

Antony and Akbar were partners who share

profits and losses in the ratio of 3:2. Balance
in their capital account on 1st January 2018
was Antony ₹ 60,000 and Akbar ₹ 40,000.
On 1st April 2018 Antony introduced
additional capital of ₹ 10,000. Akbar
introduced additional capital of ₹ 5,000
during the year. Calculate interest on capital
at 6% p.a. for the year ending 31st December
2018.

Solution

Note: Since the date of additional capital

introduced by Akbar is not given, interest on
additional capital is calculated for an average
period of 6 months.

Illustration 7

The capital account of Arivazhagan and

Srinivasan on 1st January 2017 showed a
balance of 15,000 and ₹ 10,000 respectively.
On 1st July 2017, Arivazhagan introduced
an additional capital of ₹ 5,000 and on 1st
September 2017 Srinivasan introduced an
additional capital of ₹ 10,000.

Calculate interest on capital at 6% p.a. for

the year ending 31st December 2017.

Solution

Illustration 8

From the following balance sheets of Subha

and Sudha who share profits and losses
equally, calculate interest on capital at 6%
p.a. for the year ending 31st December 2017.

Drawings of Subha and Sudha during the

year were ₹ 2,500 and ₹ 3,500 respectively.
Profit earned during the year was ₹ 15,000.
Solution

Calculation of interest on capital:

Subha:
On opening capital = 10,000×[6/100] = ₹
600
Sudha:
On opening capital = 16,000×[6/100] = ₹
960

Illustration 9

From the following balance sheets of

Brindha and Praveena who share profits and
losses in the ratio of 3:4, calculate interest on
capital at 6% p.a. for the year ending 31st
December 2017.

On 1st July 2017, Brindha introduced an

additional capital of ₹ 6,000 and on 1st
October 2017, Praveena introduced ₹
10,000. Drawings of Brindha and Praveena
during the year were ₹ 5,000 and ₹ 7,000
respectively. Profit earned during the year
was ₹ 31,000.

Solution

* Profit credited = Profit earned ₹ 31,000 –

Balance profit as per balance sheet ₹ 10,000
= ₹ 21,000. This amount is distributed in
their profit sharing ratio of 3:4.
Calculation of interest on capital:

Illustration 10

A and B contribute ₹ 4,00,000 and ₹

2,00,000 respectively as capital. Their
respective share of profit is 3:2 and the profit
before interest on capital for the year is ₹
27,000. Compute the amount of interest on
capital in each of the following situations:

(i) if the partnership deed is silent as to the

interest on capital

(ii) if interest on capital @ 3% is allowed as

per the partnership deed

(iii) if the partnership deed allows interest on

capital @ 5% p.a.

Solution

(i) Interest on capital will not be allowed as

the partnership deed is silent as to the
interest on capital.

(ii) Profit before interest on capital is ₹

27,000.

Computation of interest on capital:

Since there is sufficient profit, interest on

capital will be provided.

(iii) Profit before interest on capital is ₹

27,000.

Computation of interest on capital:

Since the profit is insufficient, interest on

capital will not be provided. Profit of ₹
27,000 will be distributed to the partners in
their capital ratio of 2:1.

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Accountancy , 12th Accountancy : Chapter 3 :
Accounts of Partnership Firms Fundamentals
Study Material, Lecturing Notes, Assignment,
Reference, Wiki description explanation, brief detail
12th Accountancy : Chapter 3 : Accounts of
Partnership Firms Fundamentals : Calculation of
interest on capital | Accounts of Partnership Firms
Fundamentals | Accountancy

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Accountancy 12th Std - TN 12th Accountancy

(English Medium) | Questions with Answers, Solution

TN State Board School - All Subjects

12th Standard - All Subjects

12th Accountancy : Chapter 3 : Accounts of

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