What is Capital?

When the owner of the business invested money or some asset in business, it is known as capital.

Hence, capital is liability for business when capital is invested in the business

Example:

Started business with cash Rs 1000000.

 the journal entry for the same will be 

Cash A/c Dr.    1000000

     To Capital A/c   1000000

(being business started with cash)

Here is real accounts and it comes in business, therefore, we Debit Cash Accounts and Capital is a Personal account by nature hence as per personal account Credit the giver t, therefore, we Credit Capital Accounts.

Capital accounts is a liability and we increase the liability of our business, therefore, we Credit Capital Accounts also.

From the above transaction, we can understand this is the journal entry in accounting when Capital is introducing in business.

It is the assumption that if a business owner does not invest the amount the business, he will keep it bank and get interest from the bank but if he invests in business, he has taken risk therefore business need to give some profit in result but that depends upon future even what will happen therefore an accounting entry of interest on capital need to be passed in the book of accounts to give some interest to businessman which is not is cash which is just adjusted from the profit or loss of the business.

Interest on capital journal entry

Interest on capital A/c Dr.

   To capital A/c

(being adjustment of interest on capital)

Here what we do at the end of accounting year business show its expense interest on capital which is Nominal by nature and expense therefore as per Nominal accounts rule it will be debited and added it to our capital.