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Interest on drawings

Drawings, in accounting terms, refer to the money withdrawn by partners of the firm for their personal use. Drawings can be either cash or in kind.

Interest on drawings is to be charged on the amount of drawings that are withdrawn by the partner. Interest is charged on drawings made by the partners only when there is an agreement among the partners in this regard.

  • Interest is charged for the period from the date of withdrawal till the Balance sheet date.
  • Interest charged on drawings is an income for the firm, however, an expense for the partners.
  • The rate of interest on drawings will be the rate agreed by the partners.
  • The amount of interest will be credited in Profit and Loss Appropriation Account of the firm.

Calculation of Interest on Drawings

Interest on drawings can be calculated by following either direct method or product method.

1. Average period Method

This method is used when the same amount is withdrawn by partners at regular periods. The following formula is used under this method to compute the interest on drawings.

Total Drawings X Rate / 100 X Average Period / 12

(Average Period = (Months left after first withdrawal + Months left after last withdrawal) / 2)

2. Product Method

This method is used when drawings are either of different amounts or are made at irregular intervals)

Total of Product X Rate of Interest/100 X1/12

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Priya Singh Chauhan

Priya Singh Chauhan

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