Page 188 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 6. Interest on Capital and Drawings:
(i) For Interest on Capital
Interest on capital refers to the amount of interest allowed on the capital invested by
the proprietor in the business.
Interest on Capital Account Dr.
To Capital Account
Interest on Capital is added to the capital of owner in the liabilities side of the
Balance Sheet and disclosed in the debit side of the Trading and Profit & Loss Account.
(ii) For Interest on Drawings
Interest on drawings refers to the interest charged on the amount withdrawn by the
proprietor from his business for personal use.
Drawings Account Dr.
To Interest on Drawings Account
Interest on Drawings is subtracted from the amount of capital along with the
drawings and also shown in the credit side of income in Profit & Loss Account.
Illustration 13: Given below is the Trial Balance of a trader as on 31st March 2011.

Particulars ( ) ( )
Cash in hand 5,000
Land & Building 80,000
Plant & Machinery 50,000
Debtors and Creditors 25,000 40,000
Stock on 1.4.2009 10,000
15% Investments on 1.4.2009 20,000
Purchases and sales 95,000 1,90,000
Bank Overdraft 20,000
Wages 28,000
Salaries 16,000
Rent, Rates and Taxes 15,000
Bad Debts 6,000
Drawings 5,000
Bills Receivable and Bills Payable 15,000 21,000
Carriage Inwards 6,000
Custom Duty on Purchases 16,000
Life Insurance Premium 4,000
Advertisement 30,000
Provision for Doubtful Debts 2,000
Interest on Investments 2,000
Trade Expenses 11,000
Furniture 20,000
Sales Tax 25,000
Capital 1,57,000
4,57,000 4,57,000

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