Suggest one reason why a partnership might decide to allow interest on capital balances?
What Is Interest On Capital?
Let us go through the concept of capital before we jump to calculating the interest that is charged on capital. Capital is the funds that are used for starting a new business or expanding an existing business.
There are a number of ways in which capital can be raised. The promoters could put in their own money, a loan can be raised, money can be raised by opting for an IPO etc. In all these cases there are certain returns that are expected by someone who is putting up the capital.
E.g. 'A' is an external investor in company XYZ. The firm had to purchase land so that they could construct a factory. 'A' lent XYZ a sum of $1,000,000. He lent this money based on the written undertaking that XYZ will pay him the fixed sum that will be equal to 20% of the capital. This is called interest on capital.
There are a number of ways in which capital can be raised. The promoters could put in their own money, a loan can be raised, money can be raised by opting for an IPO etc. In all these cases there are certain returns that are expected by someone who is putting up the capital.
E.g. 'A' is an external investor in company XYZ. The firm had to purchase land so that they could construct a factory. 'A' lent XYZ a sum of $1,000,000. He lent this money based on the written undertaking that XYZ will pay him the fixed sum that will be equal to 20% of the capital. This is called interest on capital.
12 %
No, as Mr. A is external investor and not the partner in case of firm so whatever he is getting is the interest which is expenses for the firm but not the interest on capital .
