Interest will be allowed to each partner on the capital contributed by him. Interest on capital of the partners is calculated for the relevant period for which the amount of capital has been used in the business. Capital introduced or withdrawn by a partner during the accounting year has to be taken for the purpose of calculation. The following are the points in relation to interest on a partner’s capital:
- In case the profit before interest is less than the interest on capital, the profit will be distributed in the ratio of capital contributed by each partner.
- Interest on capital is an expense to the firm and is debited to the profit and loss appropriation account.
- Interest is payable to the partners and hence, the partner’s capital account is credited with the amount of interest.
- In case of loss, no interest will be allowed on capital.