Why interest on drawings are added as well as subtracted from capital in Accounting Equations?

 
 
  • Mahesh Kumar answered Aug. 9, 2017, 1:09 p.m. at

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Because of separate entity assumption. Business Entity will charge interest from proprietor on his drawings and that charge will be income for the entity therefore it is added to capital. On the other hand business entity is liable to the owner up to capital amount so entity reduce the liability up to interest amount therefor it is subtracted.

Same is treated with interest on capital. 

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  • Mahesh Kumar answered July 15, 2017, 7:10 p.m. at

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According to separate entity concept business entity and proprietor both are separate. Interest on drawing is an income for the business entity as business entity will charge interest from proprietor on his drawings and ultimately whatever business entity earns in form of profit will go to proprietor. Therefore it is subtracted as well as added to the capital.

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asked on Mar 26, 2017 at 17:16

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