Interest on capital

Interest on capital rewards partners for the money they invest. It is allowed only if the deed provides for it, at the agreed rate, for the time the capital stayed in the business.

It is worked out like simple interest: capital × rate/100 × time, with time in months ÷ 12.

• Capital present for the whole year earns a full year's interest.
• Additional capital earns interest only from the date it is brought in.
• Capital withdrawn stops earning interest from the date it is withdrawn.

For example, at 6%: 2,00,000 for the whole year earns 12,000; 1,00,000 brought in on August 1 earns interest for 8 months, 4,000; total 16,000.

If the opening capitals are not given, work them out: opening capital = closing capital + drawings − profit credited − additional capital.

Interest on capital is an appropriation of profit, so:

• In a year of loss, no interest is allowed.
• If the profit is less than the total interest due, only the profit is distributed, in the ratio of the interest due to each partner.