CHAPTER III 

 INTEREST 



35. The Problem of Interest. In proprietary accounts, 

 all items, with the exception of interest, are easily classified as 

 costs or as income. Interest may be regarded as either cost 

 or income, according to the point of view. Since these two 

 conceptions are not interchangeable, a clear understanding of 

 this problem is necessary to avoid errors in dealing with ques- 

 tions of valuation accounting. 



36. Interest as a Cost. Interest when regarded as a cost 

 must be considered in its relation, first to the owners of capital, 

 and second, to the capital itself. In accounting, the interest 

 paid upon borrowed capital is regarded by the proprietors as a 

 cost. But it must be noted that the net profits of the business 

 are first computed, and from these profits, rather than from 

 gross income, the cost of interest is met (32). This item of 

 cost is entirely a personal matter between the owner and his 

 creditors. Should there be no borrowed capital, this cost item 

 would disappear from the account, and dividends or additions 

 to surplus, to an equal amount, would be substituted. 



But since borrowed capital is entitled to receive interest at a 

 standard rate, and this "cost" must be met, the owner con- 

 siders that his own capital is entitled to receive interest at a 

 like rate. He guarantees payment on loans, but must depend 

 on his own exertions to obtain this interest on both the borrowed 

 funds and on his own investment. Should he prefer the role of 

 money lender, his capital will earn this rate of interest without 

 the risks attendant on the business venture. The risks of lending 

 money upon good security are much less than those accom- 

 panying other forms of business. Shall he therefore charge 

 interest upon his entire capital as a cost which must be met? 

 Those who take this view will include interest, not only on 



