Financial Statements - II

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as expense for the business and the following journal entry is recorded in the books of account: In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet.

Let us assume, Ankit decides to provide % interest on his capital. This shall amount to Rs. for which the following journal entry will be recorded: This implies that net profit shall be reduced by Rs. .

As a result, the reduced amount of profit shall be added to the capital in the balance sheet. But, when interest on capital shall be added to the capital, this effect shall be