Interest on drawing | lecture 1 | ezair commercia live

Описание: Ezair Commercia is an educational coaching institute providing commerce tuition for Class 11 & 12 students. We offer online and offline classes with a strong focus on conceptual clarity, exam-oriented preparation, and practical understanding of commerce subjects.

Interest on Drawings
Interest on Drawings refers to the interest charged by a firm on the amount withdrawn by the proprietor or partners from the business for personal use. When the owner or partners take cash or goods from the business, it reduces the capital of the firm. To compensate the business for this reduction in capital, interest on drawings is charged.

Meaning and Definition

Drawings are the amounts withdrawn by the owner or partners for personal expenses. Interest on drawings is the cost of using business funds for personal purposes. It is charged to ensure fairness among partners and to discourage frequent withdrawals from the firm.

Why Interest on Drawings is Charged

To protect business capital – Frequent withdrawals reduce the funds available for business operations.

To maintain equality among partners – A partner withdrawing more should compensate the firm.

To encourage financial discipline – It discourages unnecessary or excess withdrawals.

To compensate the firm – The business loses the opportunity to earn income on the withdrawn amount.

Rate of Interest

The rate of interest on drawings is generally mentioned in the Partnership Deed.

If the deed is silent, no interest on drawings is charged.

Calculation of Interest on Drawings

Interest on drawings is calculated based on:

Amount withdrawn

Period of withdrawal

Rate of interest

Formula:

Interest on Drawings = Drawings × Rate × Time

Methods of Calculation

When drawings are made at the beginning of the year
– Interest is charged for the whole year.

When drawings are made at the end of the year
– No interest is charged because the amount is used at year-end.

When drawings are made in the middle of the year
– Interest is charged for half of the year.

When drawings are made at regular intervals

Monthly at the beginning: interest for 6.5 months

Monthly in the middle: interest for 6 months

Monthly at the end: interest for 5.5 months

Accounting Treatment

Interest on drawings is debited to the Partner’s Capital Account

It is credited to the Profit and Loss Appropriation Account

Journal Entry
Partner’s Capital A/c Dr.
To Interest on Drawings A/c

Effect on Financial Statements

Reduces partner’s capital

Increases firm’s income

Shown on the debit side of partner’s capital account

Conclusion

Interest on drawings ensures fair treatment among partners, protects business funds, and maintains financial discipline within the firm. It is an important concept in partnership accounting and is frequently asked in Class 11 and Class 12 examinations.

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