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I think this is calculation of interest on capital by effective capital method. In this method effective capital is calculated by considering Time period that the capital existed in the business and amount of capital. No.of months * amount of capital in that period Already months are part of such product. Interest = amount *rate*months/12(simple interest) So in the (product= amount*months) there is already months, so it is just enough to divide with 12.

Since the question is silent about the capital, we can make 2 assumptions. The first assumption will be that the amount is invested only on the date it is said to be invested i.e., 1,00,000 of Shilpa and 1,60,000 of Sanju are invested in January. Additional capital invested by Shilpa on 1st July is 30,000 and on 31st October is 20,000. The second assumption will be that the amount will be invested every month from the date it is said to be invested i.e., Shilpa will be investing 1,00,000 for 12 months, 30,000 for 6 months, 20,000 for 2 months. And Sanju will be investing 1,60,000 for 12 months. Under the second assumption, we take sum of the products of the investment and the period. In case of Shilpa, it will be (1,00,000 x 12) + (30,000 x 6) + (20,000 x 2) = 14,20,000 Interest for the year 2016 = 14,20,000 x 9% = 1,27,800 Interest for a month = 1,27,800 x 1/12 = 10,650. In case of Sanju, it will be 1,60,000 x 12 = 19,20,000 Interest for the year 2016 = 19,20,000 x 9% = 1,72,800 Interest for a month = 1,72,800 x 1/12 = 14,400. This method is usually used in calculating the interest on drawings.

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The essence of the method effective capital(14,20,000) as explained above by the madam is Here from the given question we cannot say shilpa invested Rs 1,50,000 in the business through out the year. So we calculated effective capital invested in business. Total capital invested per annum = [Sigma(capital invested * duration of such capital in business)]/12 From this it mean that investing Rs 1,00,000 for 12 months, and 30,000 for 6months and 20,000 for 3months this is quite equal to Investing (14,20,000/12=1,18,333) 1,18,333 for an year. So that if you can calculate interest per annum on that 1,18,333.333*9%= 10,650. Therefore annual interest on capital for shilpa is 10,650. I think this is what you required. Hope it helps!!!

The essence of the method effective capital(14,20,000) as explained above by the madam is Here from the given question we cannot say shilpa invested Rs 1,50,000 in the business through out the year. So we calculated effective capital invested in business. Total capital invested per annum = [Sigma(capital invested * duration of such capital in business)]/12 From this it mean that investing Rs 1,00,000 for 12 months, and 30,000 for 6months and 20,000 for 3months this is quite equal to Investing (14,20,000/12=1,18,333) 1,18,333 for an year. So that if you can calculate interest per annum on that 1,18,333.333*9%= 10,650. Therefore annual interest on capital for shilpa is 10,650. I think this is what you required. Hope it helps!!!

You might be aware of weighted average method for calculating averages. You can relate this method with effective capital method Where, capital invested are amounts and months are weights You can see total of weights will be 12 (because total 12 months) This 1,18,333 is the resultant weighted (AVERAGE) capital maintained through out the year. For that we will be applying interest rate to get annual interest on capital.