Glossary
Interest on capital
A reward partners give themselves for the capital they have invested, before splitting profit.
What it means
An appropriation of profit that rewards partners in proportion to their capital, credited to their current accounts.
Example
Interest at 5% on RM50,000 capital gives a partner RM2,500 before the profit share.
Why it matters
It recognises unequal capital contributions so partners who invest more are compensated first.
In practice
Interest on capital is an appropriation. It is deducted from profit in the appropriation account before the balance is shared, and the matching credit goes to each partner's current account. It rewards partners in proportion to what they invested. This is fairer when partners have put in unequal amounts.
If Aisha's capital is RM50,000 and Ben's is RM30,000, and the agreement allows 5 per cent, Aisha receives RM2,500 and Ben RM1,500 before any profit-sharing ratio is applied.
Do not treat it as a business expense. Interest on a bank loan is a real cost charged in the income statement. Interest on capital is only a way of dividing the firm's own profit among the owners. It also differs from a partnership salary, which rewards effort rather than money invested. Both are settled in the appropriation account before the remaining profit is split.
If appropriation questions leave you unsure what to deduct first, one of our teachers can walk through the order with you. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.2 Partnerships (page 16).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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