If interest on capital is debited in Profit and Loss Appropriation Account how does it affect remaining profit?

Correct answer: It decreases remaining profit

Direct answer: Option A, it decreases the remaining profit. In partnership accounting, interest on capital is an appropriation of profit, not an ordinary business expense. First, the firm calculates profit. Then interest on capital is allowed to partners and entered on the debit side of the Profit and Loss Appropriation Account. Because a debit reduces the amount left in that account, the remaining distributable profit falls. Option A is correct because the interest is deducted before the balance is shared. Option B is wrong because a debit does not increase the balance. Option C is wrong because the entry has a definite effect on remaining profit. Option D is wrong because interest on capital is not drawings; drawings are amounts withdrawn by partners. Remember: debit appropriations such as interest on capital reduce the profit left for distribution.