Interest on capital
Interest on capital is an agreed allocation of partnership profit based on partners’ capital balances. It recognises capital provided before distributing the residual profit. Use the balance, rate, timing and any restrictions specified in the agreement. In basic partnership accounts it is an appropriation, not an interest expense paid to an external lender.
Worked example
A has qualifying capital of $60,000 throughout the year and is allocated 5% interest on capital: $3,000 is credited to A’s current account before sharing residual profit.
Common mistake
Do not confuse interest on a partner’s capital with interest on a genuine loan from a partner; the latter is a finance cost.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | K1 | Direct | July 2027–August 2028 |
Related terms
Also called: Partnership interest on capital