Interest on Drawings:
Drawings
The amount withdrawn by partners in cash or in kind from the firm out of their capital or against profit to meet their personal expense is called drawing.
- Drawing may be made by partners either in cash or in the form of goods.
- Drawings may be out of capital or against profit.
Both are discussed below:
- Drawings against Capital- withdrawal of capital–
- Drawings against capital is withdrawal of amount out of his or her capital in the firm.
- Drawings against capital is debited to his or her Capital Account. It means that the capital is reduced by the amount withdrawn.
- Interest on capital is allowed on capital for the period it is used in business. As a result of drawings against capital, interest on capital is not allowed to a partner on withdrawn amount.
For example, Anmol (partner) has capital of ₹5,00,000 on 1st April, 2019. He withdraws ₹1,00,000 on 1st October, 2019 out of his capital. If the Partnership Deed allows interest on capital @ 10% p.a., Anmol will get interest of ₹45,000 on capital for the year ended 31st M 2020, calculated as follows:
On 5,00,000 @ 10 p.a. for 6 months (1st April, 2019 to 30th September, 2019) ₹25,000
On 4,00,000 (i.e., 5,00,000 — 1,00,000) @ 10% p.a. for 6 months
(1st October, 2019 to 31st March, 2020) ₹20,000
Total Interest ₹45,000
- Drawings against Profit- Withdrawal in anticipation of profit
- The amount withdrawn by partners from the firm in anticipation of their profit share to meet their personal expense is called drawing.
- Drawings against profit is debited to Drawings Account and not to the Capital account of the partner.
- Actual share of profit of a partner is known at the end of the year and date when it becomes due to the partner. Since, withdrawal is earlier than it is due, the firm charges interest for the period amount is withdrawn by the partner.
Distinction between Drawing against Capital and Drawing against Profit
| Basis | Drawing against Capital | Drawing against Profit |
| Where debited | Partners’ Capital Account is debited. | Drawing of Partners’ account is debited. |
| Part | It constitutes part of partners’ capital. | It is part of expected profit of the firm. |
| Effect on Capital | Partners’ capital is reduced. | It is recorded in partners’ current account so capital of partners is not reduced. |
| Interest on Capital | Interest on capital is affected. | Interest on drawing is affected but there is no effect on interest on capital. |
| Interest on drawings | It is not considered for calculating Interest on drawings | It is considered for calculating Interest on drawings |
Interest on Partners’ Drawings
It is charged on drawings against expected profit by the firm, if the Partnership Deed provides for charging interest on drawings.
Interest charged on drawings is transferred to Profit and Loss Appropriation Account and debited to Partners’ Capital Accounts (in case of Fluctuating Capital is Method) or Partners’ Current Accounts (in case of Fixed Capital Accounts Method).
Journal entries passed for interest on drawings are:
Partner’s Capital/Current A/c …Dr.
To Interest on Drawings A/c (Interest charged on drawings)
Interest on Drawings A/c …Dr.
To Profit and Loss Appropriation A/c (Interest on Drawings transferred)
Calculation of Interest on Drawings
Interest on drawings is always calculated with reference to time period for which money is withdrawn
Interest on drawing is calculated depending upon the availability of information
Drawings by a partner may be broadly divided into:
(i) Irregular Drawings (ii) Regular Drawings
- Irregular Drawings: It means drawings of same amount or different amounts at irregular intervals; simple and Product Method of calculating interest is followed.
In a partnership, partners are charged interest on drawings @ 15% p.a. During the year ended 31st March, 2020, a partner withdrew as follows:
| Date | Amount (₹) |
| 1st May, 20191st August, 201930th September, 201931st January, 202031st March,2020 | 2,000 5,000 2,000 6,000 2,000 |
What is the interest chargeable from the partner?
Solution:
(i) Simple Method
| Date | Amount (₹) | No. of Months up to 31st March, 2020 | Interest @ 15% |
| 1st May, 20191st August, 201930th September, 201931st January, 202031st March,2020 | 2,000 5,000 2,000 6,000 2,000 | 118620 | 2755001501500 |
| 17,000 | 1,075 |
*Interest = ₹2,000 x 15/100 x 11/12 = ₹ 275.
(ii) Product Method
| ADate | BAmount (₹) | CNo. of Months up to 31st March, 2020 | D= B X CProduct (₹) |
| 1st May, 20191st August, 201930th September, 201931st January, 202031st March,2020 | 2,000 5,000 2,000 6,000 2,000 | 118620 | 22,00040,00012,00012,0000 |
| 17,000 | 86,000 |
Interest on ₹ 86,000 @ 15% p.a. for one month is 86,000 x 15/100/1/12 = ₹ 1,075.
- Regular Drawings: It means drawings of same amount at regular intervals. Interest on drawings is calculated using Average Period Method.
Interest on Drawings = Total Drawings x Rate of Interest x Average Period*
100 12
Average Period Method: The formula for calculating interest on drawings under this method is:
Average Period= Months Left after First Drawing + Months Left after Last Drawing
2
Let us take Different situations for calculating interest on drawings under this method.
Situation 1. Every Month
Nikunj a partner draws ₹ 1,600 per month. According to partnership deed interest will be charged at 15% per annum.
| Case 1a. If a partner withdraws fixed amount in the beginning of every month, Average Period= 12Months +1 Months 2 = 6½ months Interest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 1600×12 x 15 x 13 100 2×12 = ₹1,560 |
| Case 1b. If a partner withdraws fixed amount at the end of every month, Average Period = 11 Months + 0 Month2 = 5½ monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 1600×12 x 15 x 11 100 2×12 =₹ 1,320 |
| Case 1c. If a partner withdraws fixed amount in the middle of every month,Average Period = 11½ Months + ½ Month2 = 6monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 1600×12 x 15 x 6 100 12=₹ 1,440 |
Situation 2. Every Quarter
Nitin a partner draws ₹ 3,750 quarterly. According to partnership deed interest will be charged at 10% per annum.
| Case 2a.If a partner withdraws fixed amount in the beginning of each quarter, Average Period= 12Months + 3 Months 2 = 7½ monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 3,750×4 x 10 x 15 100 2×12 =₹937.50 |
| Case 2b.If a partner withdraws fixed amount at the end of each quarter, Average Period = 9 Months + 0 Month2= 4½ monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 3,750×4 x 10 x 9 100 2×12 =₹562.50 |
| Case 2c. If a partner withdraws fixed amount in the middle of each quarterAverage Period = 10.5 Months + 1.5 Month2= 6monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 3,750×4 x 10 x 6 100 12 =₹750 |
Situation 3. During 6 months
P, Q and R are partner in a firm. They draw ₹ 6,000 during 6 months. According to partnership deed interest will be charged at 8% per annum. Calculate interest on drawings
| Case 3a.P drew ₹6,000 in the beginning of every month for 6 months ending 31st March, 2018.Average Period = 6 Months + 1 Month2= 3.5monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 6,000 x 6 x 8 x 3.5 100 12 =₹840 |
| Case 3b.Q drew ₹6,000 at the end of every month for 6 months ending 31st March, 2018.Average Period = 5 Months + 0 Month2= 2.5monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 6,000 x 6 x 8 x 2.5 100 12 =₹600 |
| Case 3c.R drew ₹6,000 in the middle of every month for 6 months ending 31st March, 2018.Average Period = 5.5 Months + 0.5 Month2= 3 monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 6,000 x 6 x 8 x 3 100 12 =₹720 |
Situation 4. During 9 months
A, B and C started business on 1st July, 2015. When drawings of ₹8,000 are made during 9 months. Calculate interest on drawings @ 10% p.a.
| Case 4a A drew ₹ 8,000 in the beginning of every month for 9 months ending 31st March, 2016.Average Period = 9 Months + 1 Month2= 5 monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 8,000 x 9 x 10 x 5 100 12 =₹3,000 |
| Case 4b B drew ₹ 8,000 at the end of every month for 9 months ending 31st March, 2016.Average Period = 8 Months + 0 Month2= 4 monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 8,000 x 9 x 10 x 4 100 12 =₹2,400 |
| Case 4cC drew ₹8,000 middle of every month for 9 months ending 31st March, 2016.Average Period = 8.5 Months + 0.5 Month2= 4.5 monthsInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 8,000 x 9 x 10 x 4.5 100 12 =₹2,700 |
Situation 5. When date of withdrawal is not given
Compute the interest on drawings at the rate of 5% per annum for the year ended 31st December, 2007 in each of the following case:
Note: When date of withdrawal is not given, the interest will be calculated on total drawings for the year for six months on average basis.
| Case 5a.if partner’s drawings during the year was ₹50,000.Interest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 50,000 x 5 x 6 100 12 =₹1,250 |
| Case 5bif partner withdraws ₹ 3,000 per month during the yearInterest on Drawings = Total Drawings x Rate of Interest x Average Period* 100 12Interest on Drawings = 3,000×12 x 5 x 6 100 12 =₹900 |
Situation 6.
When the rate of interest is given without the word ‘per annum (p.a.)’
Note:‘per annum (p.a.) word is not written or with the rate, at an average rate is written. The interest will be calculated with given rate without considering the time factor means interest will be charged for 1 year.
Calculate interest on X’s drawings @12%
| Case 6a.If he withdraws ₹4,80,000 during the year.Interest on Drawings = Total Drawings x Rate of Interest 100 = ₹4,80,000 x 12/100 = ₹57,600 |
| Case 6b.If he withdraws ₹2,000 per month during the year.Interest on Drawings = Total Drawings x Rate of Interest 100 = (₹ 2,000 x12) x 12/100 = ₹₹2,880 |
Note: While calculating interest, rate as % with the word ‘per annum’ and the rate `%’ without the word per annum must be read very carefully.
Exercise
Q1. Money withdrawn against the anticipated profits, by a partner for personal use on 1st July 2019 Rs.10,000 and interest on drawings is 6% p.a. (Books are closed on 31st March) The amount of interest will be rupees:
(a) 
(c)
Ans. (b) 450
Q2. What will be the Interest on drawing of Mr. Z from the following information as on 31.03.2021 Mr. Z withdrew
Partnership deed is silent on interest on drawings.
Interest on drawings will be:
(a)
(c)
Ans. (d) No interest on drawings
- Q3. If a fixed amount is withdrawn by a partner on the last day of each quarter, interest on the total amount is charged for ……………… months
(A) 6 (B) 4.5 (C) 7.5 (D) 3
Ans: B 4.5
Sarita Chugh M.Com, B.Edan is Accounts and Economics teacher having more than 30+ years of experience. She is Edupreneur and founded Unique Learning Academy in 2004. She believes that every child has the right to affordable education.
