3.2 Interest on Drawings

12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

A drawing is the amount withdrawn in cash or in kind, for personal purposes. A Drawings Account is opened in the name of each partner and the drawings are debited to this account. At the end of every year, the Drawings Account is closed by a transfer to the respective partner’s capital account or current account.

Interest on partners’ drawings is charged only, if the Partnership Deed specifically allows it at a particular rate. 

Journal Entries:

(a) To charge interest on drawings

Partners’ Capital A/c (In case of fluctuating capital) Dr.

or

Partners’ Current A/c (In case of fixed capital)           Dr.

To Interest on drawings A/c

(b) To close the interest on drawings account

Interest on drawings A/c                                            Dr.

                                    To Profit & Loss Appropriation A/c

Interest on drawings can be calculated by applying the following two methods:

1) Product Method

2) Average Period Method

1) Product Method:

Under this method, the amount of drawings for each period is multiplied by the period for which the amount is going to be used. Then, the product is summed up and the following formula is used to find the interest on drawings.

If the amount is withdrawn at irregular period of months:

It is easier to calculate under Product Method.

2) Average Period Method:

Interest on drawings is to be calculated with reference to the average of the periods for which the money is withdrawn.

 Interest on Drawings:

 

Calculation of Average Period :

The average period is calculated to take the period for the average of the periods applicable to the first installment and the last installment. 

 

a) If the fixed amount is withdrawn in the beginning of every month:

Take the period at the average of the periods applicable to the first and last installment.

The period of first installment is 12 months.

The period pf last Installment is 1month.

b) If the fixed amount is withdrawn in the middle of every month:

Take the period at the average of the periods applicable to the first and last installment.

The period of first installment is 11½ months.

The period of last installment is ½ month.

 

c) If the fixed amount is withdrawn at the end of every month:

Take the period at the average of the periods applicable to the first and last installment.

The period of first installment is 11 months.

The period of last installment is 0 month.

 

d) When the dates of drawings are not given:

The average of the total period is to be taken

 

1) If the drawings are for one year without dates, the average period is calculated as follows:

2) If the drawings are for 6 months without dates, then,