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In a partnership firm partners A and B are entitled to interest on capital. At year end the profit is insufficient. What is the correct treatment of interest on capital?

Answer and explanation

Correct answer: Interest will be allowed only to the extent of available profit

Interest on capital is an appropriation of profit so it is allowed only up to available profit. Do not treat it as an expense in exams.

Related tags

PartnershipAdjustmentsInterest On CapitalPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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