Practicing Success

Target Exam

CUET

Subject

Accountancy

Chapter

Accounting for Partnership

Question:

How is interest on capital calculated when there are both additions and withdrawals of capital by the partners during a financial year?

Options:

Interest is calculated only on the opening balance of the capital accounts.

Interest is calculated on the additional capital brought in by any partner during the year.

Interest is calculated on the opening balance of the capital accounts for the whole year, and on the additional capital from the date of introduction to the last day of the financial year.

Interest is calculated on the opening balance of the capital accounts for the whole year, on the additional capital from the date of introduction to the last day of the financial year, and on the reduced capital for the remaining time period.

Correct Answer:

Interest is calculated on the opening balance of the capital accounts for the whole year, on the additional capital from the date of introduction to the last day of the financial year, and on the reduced capital for the remaining time period.

Explanation:

Interest on capital is calculated according to the time period it remains in the business of the partnership firm.
On the opening balance of the capital accounts- Calculated for the whole year.
On the additional capital- Calculated from the date of introduction to the last day of the financial year.
On the reduced capital- Calculated for the remaining time period.