Payments for the Use of Capital and the Matching Process.

Abstract One of the more unsettled areas in accounting theory is the treatment of the return to various equity-holders for the use of their capital. There is disagreement on the question of which of these distributions are costs to the firm using the capital and which are to be included as income to the firm. Disagreement also exists on the question of how to account for interest that is generally considered to be cost. These two areas of disagreement prompted the writing of this paper. But no unqualified solutions are suggested. Two general methods of handling interest on creditors' equities are advocated incurrent literature: (1) treatment of interest as an expense, and (2) handling it as a distribution of income. The first treatment exhibits the interest accruing during the period on the income statement as a cost of doing business, an overall and indirect kind of expense in the period of its accrual. This method is accepted by that group of accountants who take the point of view of the owners of business enterprises.