Question

State whether the following statement is True or False.

The interest on capital is an income of the firm.

Options

• True

• False

Answer 1

False

Explanation: Interest on capital is an expense for the firm. It is the amount paid to the proprietor for the amount of capital invested by him in the business. According to the principle of separate legal entity, capital invested by the proprietor is treated as a liability of the firm. Hence, interest is provided to the proprietor.