The deed says interest on capital will be calculated on average capital. A withdrew twenty thousand rupees in the middle of the year. What is the effect on interest base?

Correct answer: Average capital will decrease

Average capital means that the capital used during different periods of the year is considered, rather than looking only at the opening or closing figure. A withdrawal reduces the amount of capital available after the date of withdrawal. If the withdrawal occurs in the middle of the year, the lower capital remains in use for the remaining months. Consequently, the time-weighted average capital becomes lower than it would have been without the withdrawal.

Thus, the correct choice is A: average capital will decrease. The exact decrease depends on the amount withdrawn and the time for which it remains withdrawn. For example, a withdrawal of ₹20,000 halfway through the year affects the capital for about half the year, so its time-weighted effect is considered in calculating average capital. It is not correct to use closing capital automatically, because the deed specifically requires average capital. The supplied answer is consistent.