to encourage the partner invest more capital in the business
interest
Interest
When capital increases, interest rates fall.
The bank pays it to you. The interest reflects the return on the capital you have loaned to the bank.
return on capital = earnings before interest and tax / capital employed * 100
interest
interest allowed by bank
Interest on capital is added on the capital account in balance sheet as interest incurred from capital is based on business entity assumption.
[Debit] Interest on capital account xxxx [credit] Capital account xxxx
interest on captial a/c dr To Partner's capital a/c
Interest
To calculate interest on capital, you can use the formula: Interest = Principal Amount × Interest Rate × Time. The principal amount is the initial capital invested, the interest rate is typically expressed as an annual percentage, and time is the duration for which the interest is calculated, usually in years. Simply multiply these three components together to determine the total interest earned or owed.
Colin Rogers has written: 'Money, interest, and capital' -- subject- s -: Capital, Interest, Money
When the rate of interest falls the demand for capital increases because it is cheaper to borrow money.
It is allowed
No interest on capital charge upon opening capital and also on fresh capital upto the extent we utilize e.g if use fresh capital for six month then according to six month ratio.
[Debit] Interest on Capital 5000 [Credit]Cash/Bank 5000