acoountancy- interest on capital, interest on loan and on drawings

3. As per ‘Business Entity Concept’ capital invested by the
proprietor in the business is considered to be loan given by
him to the business. So there will a interest charged or
allowed on capital. Interest on capital is an expense for the
business, But it is an income for the proprietor.
JOURNAL ENTRY :
Interest on capital A/c Dr.
Capital A/c Cr.

5. Interest on
capital
…………
Profit and loss A/cDr. Cr.
Liabilities Amount Assets Amount
Capital ………
Add: interest on
Capital ……… ………..
Balance sheet

6. Interest on drawings

7. Amount withdrawn by the proprietor for his personal use
from the business are called drawings. Considering the fact
that the business is a separate accounting entity, it charges
an interest on the drawings to the owner.
And it is an income to the business.
JOURNAL ENTRY :
Drawings A/c Dr.
Interest on drawings A/c Cr.

8. Interest on
drawings
…………
Profit and loss A/cDr. Cr.
Liabilities Amount Assets Amount
Capital ………
Less: drawings ………
.…….
Less: interest on
drawings .……. ………..
Balance sheet

9. Interest on loan

10. INEREST ON LOAN PAID:
Interest paid on loans taken by the business is treated as
expense and will appear on the Debit side of the Profit and
Loss account.
INEREST ON LOAN RECIEVED:
Interest received on loans given by the business is treated
as income and will appear on the credit side of the Profit
and loss account.

11. Interest on
loan (paid)
………… Interest on
loan(received) …………
Profit and loss A/cDr. Cr.
LIABILITIES AMOUNT ASSETS AMOUNT
Loan ………
add: interest
On loan ………
(PAID)
………
Loan ………
add: interest
On loan ………
(RECEIVED)
……….
BALANCE SHEET