What will be the journal entry for allowing interest on capital to partners by a partnership firm?
Answer & explanation
Correct answer: option 4
Option 1- Interest on Capital A/c Dr.
To Partner’s Capital A/c
Option 2- Interest on Capital A/c Dr.
To Partner’s Current A/c
For Allowing interest on capital:
Interest on Capital A/c Dr.
To Partner’s Capital/Current A/cs (individually)
And it is transferred to profit and loss appropriation Account by debiting P & L Appropriation A/c and crediting interest on capital.
Capital or current account is depend on the method followed by the partnership firm for maintaining the capital accounts of the partners.