Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
1
How is interest on capital treated in the books of a business?
Answer:
Expense for the business
Interest on capital is considered an expense for the business entity because it is a cost incurred for using the funds provided by the owners. It is debited to the Profit and Loss account to reduce the net profit, reflecting the cost of capital employed in the business operations.
2
Under the fluctuating capital method, how is interest on capital recorded in the partners' accounts?
Answer:
Credited to capital account
In the fluctuating capital method, all adjustments related to a partner—including interest on capital, salary, and share of profits—are recorded directly in the partner's capital account. Since interest on capital represents an income for the partner, it increases their capital balance and is therefore credited to the capital account.
3
How is interest on capital classified from the perspective of the business entity?
Answer:
An expense
Under the business entity concept, the business is treated as separate from its owners. Interest on capital is considered a cost incurred by the business for the use of the owner's funds, and therefore, it is treated as an expense in the profit and loss account.
4
When recording an adjusting entry for interest on capital, which account is credited?
Answer:
Capital account
Interest on capital is an expense for the business and an income for the owner. Therefore, the interest on capital account is debited, and the owner's capital account is credited to increase the owner's equity in the business.