Interest on Partner’s Drawings - Class 12 Partnership Accounts Fundamental

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Interest on Partners’ Drawings

Drawings is the amount withdrawn, with cask or kind by partners for their personal use. Interest on drawings are provided only when Partnership Deed provides for charging interest. Drawings may be of two types.
  • Drawings against Capital
  • Drawings against Profit
(a) Drawing against Capital
Drawings against Capital means capital withdrawn by the partner from the firm. It means capital is reduced by the amount of withdrawn. It is Drawing against capital is debited to the partner’s capital account.
Interest on drawing is not considered for drawing against capital.

Interest on capital is not allowed to partner on withdrawn amount, interest will be allowed for the period it was in business.

This case has been discussed in Interest on Capital section.

(b) Drawing against Profit

Drawings against Profit means withdrawals during the year against anticipated profit for the year. Interest is charged because of early withdrawal of profit before due date. Interest on drawings charged for the period of amount is withdrawn by the partner.

Drawings against profit is debited to Drawings Account and not the capital Account of partner.

Interest on drawings is debited to partner’s capital account and transferred to Profit and Loss Appropriation Account.

Accounting Treatment:

Calculation of Interest on Drawings

Drawings by partners may be categorized into two group
i. Irregular Drawings: Drawings of same or different amount at irregular intervals.
Product Method is followed in such a case
ii. Regular Drawings: Drawings of same amount at irregular intervals.
Average Period Method followed in such a case

(I) PRODUCT METHOD

When unequal amount is withdrawn at different dates or when there is irregular drawings, interest on drawing id calculated with the Simple Method or Product Method.

  • Simple Method

Under this method, interest on drawings is calculated for the period the amount id drawn. The interest is calculated with reference to each drawing.

  • Product Method

Under this method, the amount of drawings is multiplied with the number of months or number of days it is drawn. The product so obtained is totaled and interest is calculated there on for one month or one day, as the case, if the period taken as month or day respectively.

(II) AVERAGE PERIOD METHOD

This method is used when there is regular drawings or when

  1. The amount of drawings is uniform and
  2. The time interval between the two drawing is also uniform
Point should be Remembered for Interest on Drawings
  1. Interest on Drawings is charged for the period amount withdrawn by a partner.
  2. When rate of interest is given without the word “per annum”, interest is charged without considering the time factor.
  3. Average Method of calculating Interest on Drawings is applied when both amount of Drawings and Date of Withdrawal are uniform.
  4. Product Method of calculating Interest on Drawings is applied when amount of Drawings and or Date of Withdrawal is not uniform.
  5. In Average Method, Period for which interest on Drawings is to be calculated as follows

Quick guide for Average Period

When Dates of Withdrawal are not specified

When the total amount withdrawn is given but the dates of withdrawals are not specified, it is assumed that the amount was withdrawn evenly throughout the year. Interest on total drawings for the year is calculated for six months on the average basis.

Illustration

Rajesh withdraws 20,000 on the first day of every month for six months ending September, 2019 Calculate interest on Drawings for the year ended 31st March, 2020 if rate of interest is 10 % p.a.

Solution by Average Method

Total Amount of Drawings = 20,000 x 6 = 1,20,000

Solution by Product Method


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