Question

The following account is debited for allowing interest on partners’ capital:

• A. Profit and Loss Account
• B. Partners’ Current Account
• C. Interest on Capital Account
• D. Partners’ Capital Account

Hint:

Always debit Profit and Loss A/c for all expenses, including interest on capital provided to partners.

Answer 1

The Correct Option is A

Interest on capital is an expense for the firm.
It is the cost incurred by the business for using the capital contributed by the partners.
Like all other expenses, this is debited to the Profit and Loss Account.

When the firm allows interest on capital to partners, it is recorded by the following journal entry:
Journal Entry:
\begin{verbatim} Profit and Loss A/c Dr. To Partners’ Capital / Current A/c \end{verbatim} This clearly shows that the expense (interest on capital) is debited to Profit and Loss Account.