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 HOW TO CALCULATE INTEREST ON CAPITAL
Interest on capital is always calculated on OPENING BALANCE OF CAPITAL. If closing balance of capital is given in
the question, we find opening balance of capital by the following way then calculate interest on capital.
If Capital is fluctuating:- If Capital is fixed:-
Closing Capital ……………. Closing Capital …………….
(+) Drawings (Out of Capital) (+)………… (+) Drawings (Out of Capital)
(+) Drawings (Out of Profits) (+)…………. (Withdrawal of Capital) (+)…………
(+) Share of Loss for the year (+)…………. …………….
(+) Interest on Drawings (+)…………. (-) Additional Capital (-)………….
……………. Opening Capital ……………
(-) Share of Profit for the year (-) …………
(-) Partner’s Salary/Remuneration/Commission (-)………….
(-) Additional Capital (-)………….
Opening Capital ……………
EXAMPLE-2 (A). Ram and Krishna are partners in
a firm. Their capitals as on April 1, 2016 were Rs. 2,50,000 and Rs. 1,50,000 respectively. They share profits
equally. On July 1, 2016, they decided that their capitals should be Rs. 2,00,000 each. The necessary adjustments
in the capitals were made by introducing or withdrawing cash. Interest on capital is allowed at 8% p.a. Compute
interest on capital for both the partners for the year ending on March 31, 2017.
Ans. Interest on Capital :- Ram – Rs. 17,000; Krishna – Rs. 15,000.
EXAMPLE-2 (B). Arun and Varun are partners in a firm sharing profits and losses equally. Their capitals on 1st
April, 2016 were Rs. 4,80,000 and Rs. 5,40,000. On 1st October, 2016, they decided that the total capital of the
firm should be Rs. 10,00,000 to be contributed equally by both of them. According to the partnership deed,
interest on capital is allowed to the partners @ 6% p.a. You are required to compute interest on capital for the
year ending 31st March, 2017. (ISC Sample Paper, 2017)
Ans. Interest on Capital :- Arun – Rs. 29,400; Varun – Rs. 31,200.

EXAMPLE-3 Amit and Anil are in partnership in the ratio of 3:2. They are allowed interest on capital @ 12% p.a.
on the opening capital and 10% p.a. on the additional capital contributed during the year. The opening capitals of
Amit and Anil on 1st April, 2016 were Rs. 30,000 and Rs. 20,000 respectively. Amit, on 1st August, 2016 made an
addition of Rs. 9,000 to his capital, while Anil contributed Rs. 27,000 on 1st October, 2016 to his capital. Find out
interest in capital for the year ending 31st March, 2017 and pass journal entry relating thereto.
Ans. Interest on Capital : Amit – Rs. 4,200(Rs. 3,600 + Rs. 600); Anil : Rs. 3,750 (Rs. 2,400 + Rs. 1,350).

EXAMPLE-4 P and M are partners in a firm. Their capital accounts showed the balance on April 1, 2016 as Rs.
4,00,000 and Rs. 3,00,000 respectively. On August 1, 2016 they introduced further capitals of Rs. 50,000 and Rs.
40,000 respectively. M withdrew Rs. 15,000 from his capital on March 1, 2017. Interest on capital is allowed @
6% p.a. Compute interest on capitals for the year ending March 31, 2017.
Ans. Interest on Capital :- P – Rs. 26,000; M – Rs. 19,525.

EXAMPLE-5 P and M are sharing profits in 2:3 ratio. On 01.04.16 their capital account showed balance of Rs.
30,000 and Rs. 50,000 respectively. On 30.06.16, P made contributions to his capital amounting Rs. 8,000 and on
the same date M contributed Rs. 10,000. On 1.10.16 M withdrew Rs. 15,000 and he further deposited Rs. 7,000
on 28.02.17. On 31.10.16 P withdrew Rs. 1,200 and on 1.03.17 he deposited Rs. 6,000. Find out interest on
capital @ 12% for 2016-17. Ans. Interest on Capital : P – Rs. 4,320; M – Rs. 6,070.

EXAMPLE-6 A and B are partners sharing profits and losses in the ratio of 3 : 1. Their capitals at the end of the
financial year 2015-16 were Rs. 6,00,000 and Rs. 3,00,000. During the year 2015-16, A’s drawings were Rs. 80,000
and the drawings of B were Rs. 40,000, which had been duly debited to partner’s capital accounts. Profit before
charging interest on capital for the year was Rs. 80,000. The same had also been credited in their profit sharing
ratio. B had brought additional capital of Rs. 70,000 on October 1, 2015. Calculate interest on capital @ 12% p.a.
for the year 2015-16. Ans. Interest on Capital:- A – Rs. 74,400; M – Rs. 34,200.

EXAMPLE-7 A and B started business on 1.04.16 with capitals of Rs. 60,000 and Rs. 40,000 respectively. During
the year A introduced Rs. 10,000 to the firm as additional capital on 1.10.2016. They withdraw Rs. 500 p.m. for
household expenses in lieu of profits. Interest on capital is to be allowed @ 10%. Calculate the interest payable
to A and B for the year ending 31.03.17. Ans. Interest on Capital : A – Rs. 6,500; B – Rs. 4,000.

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EXAMPLE-8 Sonu and Monu are partners in a firm. They share profit in 2:3 and losses in 1:2 ratio. During the year
ended 31.03.17, they earned profits Rs. 25,000. On 31.03.17 their capitals were: Sonu Rs. 90,000 and Monu Rs.
70,000 respectively.
Sonu withdrew Rs. 2,000 p.m. from April to August, 2016 and then after drawing were increased by 50% p.m. till
January, 2017.
Monu withdrew Rs. 3,000 p.m. with effect from November, 2016.
Commission Rs. 5,000 was credited to Sonu and salary Rs. 8,000 was given to Monu.
Sonu contributed Rs. 15,000 to the capital on 31.10.16 and Monu contributed Rs. 8,000 on 01.12.16.
Interest @ 12% p.a. was omitted on opening capital during the year. Calculate interest on capital.
Ans. Opening Capital: Sonu – Rs. 85,000; Monu – Rs. 54,000; Interest on Capital : Sonu – Rs. 10,950;
Monu – Rs. 6,800.

EXAMPLE-9 X and Y are partners sharing profits in the ratio of 3 : 2. On 31st March, 2017 after closing the books
of account, their capitals are Rs. 10,00,000 and Rs. 12,50,000 respectively. On 1stMay, 2016, X had introduced an
additional capital of Rs. 2,50,000 and Y withdrew Rs. 1,25,000 from his capital. On 1st October, 2016, X withdrew
Rs. 5,00,000 from his capital and Y introduced Rs. 6,25,000. After closing the accounts, it was discovered that
interest on Capital @ 6% p.a. has been omitted. During the year ended 31st March 2017, X's drawings and Y's
drawings were Rs. 2,50,000 and Rs. 1,25,000. Profits (before interest on Capital) during the year were Rs.
5,00,000.
Calculate Interest on Capital if the capitals are (a) fixed and (b) fluctuating.
Ans. Case (a) Opening Capital: X – Rs. 12,50,000; Y – Rs. 7,50,000; Interest on Capital : X – Rs. 73,750;
Y – Rs. 56,875.
Case (b) Opening Capital: X – Rs. 12,00,000; Y – Rs. 6,75,000; Interest on Capital : X – Rs. 70,750; Y – Rs.
52,375.
EXAMPLE-10 From the following Balance Sheet of X and Y, calculate interest on capital @ 5% p.a. for the year
ended 31st March, 2017:- Balance Sheet (as on 31st March, 2017)
Liabilities Amount Assets Amount
X’s Capital 1,00,000 Sundry Assets 2,10,000
Y’s Capital 80,000 Drawings – X 10,000
Profit and Loss Appropriation A/c 40,000
(2016-17)
2,20,000 2,20,000
st
During the year ended 31 March, 2017, X’s drawings were Rs. 10,000 and Y’s drawings were Rs. 30,000 and
Profits during the year ended 31st March, 2017 were Rs. 60,000.
Ans. [Interest on capital – X – Rs. 4,500; Y – Rs. 5,000].

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PRASHANT’S COMMERCE ACADEMY FUNDAMENTALS OF PARTNERSHIP