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Answer Posted / h.r. sreepada bhagi
There can not be interest on Capital.
In case of a company, interest can be paid on loan from
banks, financial institutions or others including directors.
Since it's the cost of borrowed funds, it's charged to the
P&L A/c as an expense. Return on capital is paid to the
shareholders in the form of dividend and not interest.
In the case of partnership firms again, interest can be paid
on funds borrowed from banks, partners, financial
institutions or others and the cost of the funds so borrowed
is treated as expense. The partners' get share of profit of
the firm as per the 'Partnership Deed' as return on the
capital put in by them. However if the firm has received
money and is maintaining Partners' Current A/cs, interest
can be given on this & needs to be charged off to P&L A/c.
In case of proprietorship concerns also, interest paid on
borrowed sums should be treated as expense of the period to
which it relates. The profit earned by it is the return on
capital invested by the Owner/Proprietor/Proprietress.
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