The correct answer is: C. Average capital.
Interest on capital is a method of distributing profits among partners in a partnership. It is calculated by multiplying the partner’s capital balance by the agreed-upon interest rate and then dividing by the number of months in the year. The interest is then added to the partner’s share of the partnership’s profits.
The average capital is the total capital contributed by all partners over the course of the year, divided by the number of months in the year. This is the most accurate way to calculate interest on capital, as it takes into account the fact that partners’ capital balances may fluctuate throughout the year.
The capital in the beginning of the year is not a good measure of a partner’s contribution to the partnership, as it does not take into account any additional capital that may have been contributed during the year. The capital at the end of the year is also not a good measure, as it does not take into account any capital that may have been withdrawn during the year.
Drawings are amounts of money that partners take out of the partnership for their own use. They are not considered to be a return on investment, and they are not included in the calculation of interest on capital.