Q.Interest on Capital allowed to the proprietor is:
(A) Debited to P&L Account and credited to Capital Account
(B) Credited to P&L Account and debited to Capital Account
(C) Debited to P&L Account only, with no Balance Sheet effect
(D) Ignored in a sole proprietorship, since there is only one owner

Interest on capital is an expense to the business (debited to P&L) and simultaneously a direct credit to the owner's Capital Account, in addition to Net Profit.

Interest on Capital compensates the proprietor for funds invested in the business — it is treated as a business expense (debited to the Profit and Loss Account, reducing Net Profit), and the SAME amount is credited DIRECTLY to the Capital Account in the Balance Sheet, in addition to the Net Profit transferred there.

Option-by-option analysis:

• (A) Correct — this is exactly the double effect.
• (B) Incorrect — this reverses the correct debit/credit treatment. …