Interest on Drawings

Interest on Drawings

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

DateParticularL/FDebitCredit
xxxxDrawingxxxx
      Interest on Drawingxxx
(Narration)

General Journal

DateParticularL/FDebitCredit
xxxxPartner’s A Current Accountxxxx
Partner’s B Current Accountxxxx
Partner’s C Current Accountxxxx
        Profit and Loss Appropriation Accountxxxx
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

We also have:

What is Joutnal Entry in Accounting?

What is Ledger in Accounting?

What is Trial Balance in Accounting?

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