Journal Entry of Interest on capital and Interest on Drawing in Accounting

Journal Entry of Interest on capital and Interest on Drawing in Accounting

Journal Entry of Interest on Capital

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 businessman 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 pass 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 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

 

 

 

Interest on capital On profit and loss Accounts

First of all journal entry of Interest on capital need to be pass

Which is

Interest on capital A/c Dr

XXXX

   To Capital A/c

   XXXX

(being interest on capital)

 

 

Then this interest on capital needs to be pass in Profit and Loss in Final accounts which need to be in debit side of profit and loss accounts because it is an expense of the business and  need to be added to the capital of the owner in balance sheet.

DR                                                                          CR

Particular

Amount

Particular

Amount

To Interest on capital A/c

XXXX

 

 

 

 

 

 

 

 

Interest on capital in Balance Sheet

Interest on Capital on Balance sheet

 

Liabilities

Amount

Assets

Amount

Capital A/c                                XXX

(ADD)+ Interest on Capital    XXX

XXXX

 

 

 

 

 

 

 

Interest on capital added to the capital of businessman as he is the one who invested in business so whatever is the interest on capital that is added to its Capital at the end of accounting year

Journal Entry of Interest on drawing

journal entry for interest on drawing

What is drawing?

When the owner withdrawal money from the business for personal use it is known as drawings.

Journal entry of Drawing

Example

Drawing A/c Dr.

XXXX

To Drawings A/c

   XXXX

(being interest on the drawing)

 

If business keeps on withdrawing money form business it affects a business, therefore, to deter businessman to reduce the number of drawing from business interest is charged from the Business owner which is known as Interest on drawing and journal entry of the same will be

Drawing A/c Dr

XXXX

To Interest on Drawing A/c

   XXXX

(being interest in Drawing)

 

Interest on Drawing is gain or profit for business and Nominal by nature therefore it will be added to the credited in a journal entry

Interest on Drawing in Profit and Loss Accounts

Interest on drawings

Interest on Drawing is gain or profit for business and Nominal by nature therefore it will be added to the credited in a journal entry

 

 

Interest on the drawing is Income by nature therefore it will be shown in the credit side of profit and loss accounts. This is just an accounting entry made at the end of an accounting year in the books of accounts the rate of interest should be mention in the deed which was created when the business is formed. It increases the profit in the books of accounts.

Example

 

DR                                                                          CR

Particular

Amount

Particular

Amount

 

 

To Interest on Drawings A/c

XXXX

 

 

 

 

 

Interest on Drawing in Balance sheet

Liabilities

Amount

Assets

Amount

Capital A/c                                XXX

(LESS)- Interest on Drawings   XXX

XXXX

  
    

Interest on Drawings is Deducted from the capital in the Liability side of Balance sheet. 

 
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