Meaning of “Drawings” & “Interest on Drawings”
Partnership and partners are considered separate from each other. When partners withdraw money from business, for their personal use, then the term used for such withdrawal of money is known as Drawings. Since, drawings is a type of loan provided to the partner, the partner has to pay interest on the amount withdrawn from the firm , which is known as interest on drawings.
Nature of the drawings
The nature of the drawings can be :
1. Drawings against salary or commission
2. Drawings against interest on capital
3. Drawing against share of profits etc.
Calculation of Interest on drawings
Interest on drawings should be calculated from the date of the withdrawal of the amount.
In case the date of the withdrawal is not given, interest should be charged for six months on the total amount, because it is assumed that the drawings were made evenly throughout the year.
Methods of Calculating Interest on drawings:
There are two methods to calculate interest on drawings : –
- Simple Method: Under this method, interest on drawings is calculated on each and every amount of drawing separately. It is calculated from the date of drawing till the close of accounting period. The formula to calculate interest is:
2. Product Method: In this method, the following steps are performed : –
- Calculate products of each drawing and its duration.
- Add different products
- Interest is calculated on the total of products so arrived at , for a period of one month. The formula to calculate interest under this method is:
Interest on Monthly Drawings:
In certain cases, drawings could be made on a monthly basis, either at the beginning of every month, or middle of every month or end of every month. The interest under each of these cases is calculated as under : –
(II) Interest on Drawings -Drawings made at the end of every month:
(III) Interest on Drawings – Drawings made at the mid of every month:
Interest on Quarter Drawings:
(IV) Interest on Drawings – Drawings made at the beginning of each quarter :
(V)Interest on Drawings – Drawings made at the end of each quarter:
(VI)Interest on Drawings – Drawings made at the mid of each quarter: