0Interest on Drawings
Interest on drawings is the interest charged on the amount withdrawn by a partner or proprietor from the business for personal use. It's considered a reduction in the partner's capital or owner's equity.
Methods of Calculating Interest on Drawings
There are two common methods:
1. Simple Interest Method
Interest = Principal × Rate × Time
- Principal: Amount withdrawn
- Rate: Interest rate per annum
- Time: Average period of withdrawal (in years)
2. Product Method
Interest = (Amount × Time) × Rate / 12
- Amount: Amount withdrawn
- Time: Number of months
- Rate: Interest rate per annum
Example
Suppose a partner withdraws ₹ 10,000 on April 1st and ₹ 5,000 on July 1st. The interest rate is 12% per annum.
Using the Product Method:
- ₹ 10,000 × 12 months = ₹ 1,20,000
- ₹ 5,000 × 9 months = ₹ 45,000
- Total product: ₹ 1,65,000
- Interest: ₹ 1,65,000 × 12% / 12 = ₹ 1,650
The interest on drawings is ₹ 1,650.
