Is there interest on capital in sole proprietorship?

The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable.

Interest on capital is the amount paid by the entity/business to the owners. It is an expense to the business and income for the proprietor, and interest is adjusted in the owner’s capital account. It is calculated on an agreed percentage and for a certain period. It is paid before calculating net profit.

If there is a loss, no interest will be paid on capital.

Journal Entry for Interest on Capital in Sole Proprietorship:

1. Interest on capital entry

2. Closing interest on capital account

In sole proprietor’s Profit and Loss A/c interest will be recorded as an expense on the debit side and will be added to the owner’s capital in the Balance Sheet is considered as an adjustment to the capital account.

For example, A invested Rs 1,00,000 in a business. He wants to adjust 5% interest on his capital, then the entry will be:

1. Interest on capital entry

2. Closing interest on capital account

In the case of a partnership, the treatment is the same as done in a sole proprietorship. The interest rate is agreed upon by the partners and is mentioned in the partnership deed. No interest is provided on the capitals of the partners if not mentioned in the deed.

If in a particular period, the partnership firm incurs a loss, then no interest will be provided to the partners.