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Interest on capital is added toChoose one optionExpense A/cIncome A/cCapital A/cGoodwill A/c

Question

Interest on capital is added to

Choose one option:

  • Expense A/c
  • Income A/c
  • Capital A/c
  • Goodwill A/c
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Solution

To address the question regarding where interest on capital is added, we need to understand the impact of this interest on the financial statements.

  1. Understanding Interest on Capital: Interest on capital is the return that an owner or partner receives on their investment in the business. It is compensation for the use of those funds.

  2. Treatment in Accounting: Interest on capital is generally considered an expense for the business when it is paid out to the owners, but it also reflects on the profit-sharing of the partners if it's distributed.

  3. Options Analysis:

    • Expense A/c: This is where the business records its expenses. Adding interest here would imply that it is a cost incurred by the business.
    • Income A/c: Interest on capital is not income in the traditional sense for a business; it doesn't come from operations.
    • Capital A/c: This would reflect the owner's capital, and interest added here accounts for the increase in the owner's equity reflecting their rightful earnings from the business.
    • Goodwill A/c: Goodwill generally reflects intangible assets and is not related to interest on capital directly.

Given this analysis, the correct option is Capital A/c, as it represents the owner's investment and the interest earns on this capital increases the capital account of the owner.

Final Answer

Interest on capital is added to Capital A/c.

This problem has been solved

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