Interest on Drawings
Drawings are the funds pulled by partners from the firm, as opposed to capital invested. So, in order to maintain a fair profit allocation, a condition in the agreement that charges interest on the partners’ drawings may be included. Again, this can be applied to the whole amount or to a sum that exceeds a particular limit. This is decided by the agreement made between parties.
Drawings are charged from the partners, thus they should be considered as revenue. However, this is not the case. Interest on drawing, like partners’ salaries, will be included in the Profit and Loss Appropriation Account. Partners’ wages, interests, and so on are never considered company expenses or revenue. They are a component of PROFIT DISTRIBUTION.
Exceptions:
Rent paid to a partner for the use of his premises, purchases of stocks, assets, or other items for company purposes, all of these costs are charged to the partnership firm’s profit and loss account.
Interest on Drawings Journal Entry
General Journal
| Date | Particular | L/F | Debit | Credit |
| xxxx | Drawing | xxxx | ||
| Interest on Drawing | xxx | |||
| (Narration) |
General Journal
| Date | Particular | L/F | Debit | Credit |
| xxxx | Partner’s A Current Account | xxxx | ||
| Partner’s B Current Account | xxxx | |||
| Partner’s C Current Account | xxxx | |||
| Profit and Loss Appropriation Account | xxxx | |||
| To record interest on Drawing |
Interest on Drawing Formula:
Interest on Drawings = Amount of drawings x Rate of Markup or Interest x Period of interest
Example:
Mr. Naeem works as a partner in a partnership. During the fiscal year, he Drew the following:
September 1, 3000
November 1, 6000
January 1, 5000
March 1, 2000
June 1, 1500
Calculate the markup on his drawings assuming the rate of markup is 5%. The fiscal year lasts from July to June.
Solution:
3000 x 5% = 150 x 10/12 = 125
6000 x 5% = 300 x 8/12 = 200
5000 x 5% = 250 x 6/12 = 125
2000 x 5% = 100 x 4/12 = 33.333
1500 x 5% = 75 x 1/12 = 6.25
Total Markup 489.583
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