Interest on Partner’s Capital

Interest on Partner's Capital

There are three issues relating to the Interest on capital:

(a) Rule regarding whether to allow or not (as already discussed). IOC Rule

(b) Treatment, Journal entries and Ledger accounts (as already discussed). IOC Journal Entries

(c) Calculation, the amount of Interest on Capital (discussed here).

Calculation of Interest on Capital

Interest on Capital is always calculated on the basis of Opening Capital, and with respect to the period it has been used in the business. Simple Interest formula is to be used:

Interest on capital = (Amount*Rate*Months)/1200

Example:

You can calculate, Interest on Capital @ 6% p.a. on ₹30,000 for the whole year, as under:

Interest on Capital= (30,000*6*12)/100*12= 1,800 or directly=6% of 30,000 (for full year).

 

In case of Additional Capital during the year many times, You can use Product method as under:

Amount of capital	No. of Months of using the amount during the accounting year	Product(of the first two columns)
		Product Total

Interest on Capital of the Partner = (Product Total*Rate)/1200

Calculating Opening Capital from Closing capital:

Opening Capital = Closing capital + Drawings - Net Profit - Additional Capital.

 

 

 

 

Interest on Drawings