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Interest on Capital

Usually the owner gets an Interest on his investment the business. According to the principle of separate entity, Capital is considered as Liability for the business and the owner is paid a certain amount of interest on the capital employed.

Accounting Entries

 

Interest on Capital  Dr.
  Capital Account  
(Interest allowed on Capital)  

Accounting Treatment in Final Accounts

Interest on Capital is an expense for the business and thus appears on the Debit side of the Profit and Loss account.
It is a gain for the owner and thus it is added to the Capital in the Balance Sheet.

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