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
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.
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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.
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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.
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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.
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