Anushka Lalwani In: 1. Financial Accounting > Miscellaneous What is interest on drawings formula? What is interest on drawings formula? 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 Pooja_Parikh Aspiring Chartered Accountant 2021-12-15T19:23:52+00:00Added an answer on December 15, 2021 at 7:23 pm This answer was edited. In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period for which the money was withdrawn. This amount is called Interest on Drawings. The journal entry for interest on drawings is as follows: Since interest on drawings is an income to the firm, it is credited based on the rule that “increase in incomes are credited”. Since the partner has to bear the interest amount, his capital account is debited as a “ decrease in capital is debited”. FORMULAS The basic formula for interest on drawings is: Interest on drawings = Amount of Drawings x Rate/100 x No. of months/12 When equal amounts of drawings are withdrawn at the beginning of every month, then Interest on Drawings = Total Drawings x Rate/100 x (12+1)/2 When equal amounts of drawings are withdrawn at the end of every month, then the Interest on Drawings = Total Drawings x Rate/100 x (12-1)/2 When the date of the drawing is not specified, it is assumed to be withdrawn evenly. Hence Interest on Drawings = Total Drawings x Rate/100 x 6/12 The calculations in 1,2 and 3 are done so that drawings can be calculated for the average period. EXAMPLE Jack is a partner who withdrew $20,000 on 1st April 2020. Interest on drawings is charged at 10% per annum. If we have to calculate interest on drawings as of 31st December, then Interest on Drawings = 20,000 x 10/100 x 9/12 = $1,500 (Here, interest on drawings is outstanding for 9 months, that is from April to December) 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?