Question

Illustrate how interest on drawings will be calculated under various situations.

Answer 1

When a partner withdraws any amount, either in cash or in any other form, from the firm for his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of drawings is termed as interest on drawings. The method of calculating interest on drawings depends on the information available for time and frequency of the drawings made by the partner. The following different situations of drawings made illustrate the calculation of interest charged on drawings.

Situation 1: When information regarding Amount, Date and Rate of Interest on drawings are given.

If a partner withdrew Rs 10,000 on May 01 and interest on drawing is charged at 10% p.a. and the firm closes its books on December 31 every year then interest of drawings amounts to Rs 667.

Situation 2: When information regarding Amount, Rate of Interest on drawings is given

Case I: If the Amount and Rate of Interest on drawings (per annumn) is given but date is not mentioned

If the details regarding the amount of drawings and rate of interest of drawings (p.a.) is given but the date of drawings is not mentioned then interest is charged on average basis and the period of drawings is taken as 6 months.

Example- If a partner withdrew Rs 10,000 and rate of interest on drawings is 10% p.a. then the interest of drawings amounts to Rs 500

Case II: If the Amount and Rate of Interest on drawings is given but the date and per annumn rate of interest is not mentioned

If the date and the rate of interest are given but per annum is not specified, then annual interest is charged.

Example- If a partner withdrew Rs 20,000 and interest rate is 10% , then the interest on drawings amounts to Rs 2,000.

Situation 3: When a fixed amount is withdrawn at regular interval

Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is calculated for 6.5 months.

Example- If a partner withdraws Rs 1,000 in the beginning of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 650.

Interest on drawings

Case II: If a fixed amount is withdrawn at the end of each month, then the interest is calculated for 5.5 months

Example- If a partner withdraws Rs 1,000 at the end of each month and rate of interest is 10% p.a., then the interest on drawings amount to Rs 550.

Case III: If a fixed amount is withdrawn in the middle of every month then assuming that the drawings are made on15^th of every month then interest on drawings is calculated for 6 months

Example- If a partner withdraws Rs 1,000 on 15^th of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 600.

Case IV: If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated for 7.5 months

Example- If a partner withdraws Rs 3,000 in the beginning of every quarter and the rate of interest is 10% p.a. then the interest on drawings amount to Rs 750

Case V: If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5 months

Example- If a partner withdraws Rs 3,000 at the end of every quarter and the rate of interest is 10% p.a., then the interest on drawings amounts to Rs 450.

Situation 4:

When different amount is at different intervals

If different amount is withdrawn by a partner at different points of time then the interest is calculated by Product Method. The period of drawings is calculated from the date of withdrawal to the last date of the accounting year.

Example- A partner withdraws Rs 5,000 on Feb 01, Rs 3000 on May 01, Rs 5,000 on Sep. 30 and Rs 1000 on Dec. 31 and the rate of interest on drawings is 10% p.a. The firm closes its book on December 31.

Calculation of Interest on Drawings by Product Method

Interest on Drawings
Date	Amount Rs	Outstanding Period	Product
Feb. 01	5,000	11	5,000 ´ 11	=	55,000
May. 01	3,000	8	3,000 ´ 8	=	24,000
Sep. 30	5,000	3	5,000 ´ 3	=	15,000
Dec. 31	1,000	0	1,000 ´ 0	=	0
					94,000