Anushka Lalwani In: 1. Financial Accounting > Accounting Terms & Basics Can you explain interest on drawings? Can you explain interest on drawings? Share Facebook You must login to add an answer. Username or email* Password* Captcha* Remember Me! Forgot Password? Need An Account, Sign Up Here 1 Answer Voted Recent GautamSaxena Curious . 2022-07-25T20:39:53+00:00Added an answer on July 25, 2022 at 8:39 pm This answer was edited. Interest on drawings Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by its owners for personal use and must be recorded as a reduction of assets. It’s paid back to the business with some interest. Interest on drawings is an income for the business and reduces the capital of the owner. Interest on drawings is the amount of interest paid by the partners, calculated concerning the period for which the money was withdrawn. It’s an income for the business. Hence, credited to P&L Appropriation A/c. It’s an expense for the owner/partner. Therefore, debited to owner’s/partner’s capital a/c Interest on drawings is charged to the partners only when there is an agreement made among the partners in this regard or if it is mentioned in the Partnership Deed. Formulae for Interest on drawings There are three formulae used for calculating the interest on drawings. They are: 1. Simple Method: In this method, as the name suggests, the amount of interest on drawings is calculated simply for the time the amount has been utilized. Interest on Drawings = Amount of drawings × Rate/100 × No. of Months/12 2. Product Method: This method is used when- Drawings are made of unequal amounts at irregular intervals of time. Then this formula is used- Interest on Drawings = Total of Products × Rate/100 × 1/12 When drawings are made of equal amounts at regular/equal intervals of time. Then interest on drawings can be calculated on the total of the amount drawn, for the average of the period applicable to the first and last installment. Interest on Drawings= Total amount of drawings × Rate/ 100 × Average Period/12 Also, note- Average Period = (No. of months left after first drawings+ No. of months left after last drawings)/2 Example: Harish withdrew equal amounts at the beginning of every month for 9 months. Total drawings amounted to ₹6,000. Calculate the interest on drawings charged if the rate was 6% p.a. Solution: Average period = (No. of months left after first drawings+ No. of months left after last drawings)/2 = (9+1)/2 = 5 months Interest on Drawings = Total of drawings × Rate/100 × 5/12 = ₹ 6,000 × 6/100 × 5/12 = ₹ 150. Journal entry for interest on drawings: Interest transferred to Profit & Loss A/c: 0 Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Related Questions What are some examples of deferred revenue expenses? Are brands intangible assets? What comes in debit side of Realisation account? What is recorded in the Realisation account? What is not included in Realisation account? What is recorded on the credit side of a Realisation account? Can accounts payable have a debit balance?