Interest on drawings can be computed by following either direct method or product method.

**Calculation
of interest on drawings**

Interest on drawings can
be computed by following either direct method or product method. Also if the
partners withdraw fixed amount at fixed time interval, interest on drawings may
be calculated on the basis of the average period method. Based on the dates of
drawings and the amount of drawings, different methods can be followed for
calculating interest on drawings.

Interest is calculated
on drawings for the period from the date of drawings to the date of closing
date of the accounting year. The following formula is used to compute the
interest on drawings:

Interest on drawings =
Amount of drawings x Rate of interest x Period of interest

Period of interest
refers to the period from the date of drawings to the closing date of the
accounting year. This method is suitable when different amounts are withdrawn
at different time intervals.

**Illustration 11**

Velan is a partner who
withdrew ₹ 20,000 on 1st April
2018. Interest on drawings is charged at 10% per annum. Calculate interest on
drawings on 31st December 2018 and pass journal entries by assuming fluctuating
capital method.

**Solution**

Interest on drawings = Amount of drawings x Rate of interest x Period of interest

**Illustration 12**

Arun is a partner in a partnership firm. As per the partnership deed, interest on drawings is charged at 12% p.a. During the year ended 31st December 2018 he drew as follows:

Calculate the amount of interest on drawings.

**Solution**

Interest on drawings = Amount of drawings x Rate of interest x Period of interest

**Illustration 13**

Arul is a partner in a
partnership firm. As per the partnership deed, interest on drawings is charged
at 12% p.a. During the year ended 31st December 2018 he drew as follows:

Calculate the amount of interest on
drawings.

**Solution**

Interest on drawings = Amount of drawings × Rate of interest × Period of interest

**Illustration 14**

Rajan is a partner who
withdrew ₹ 30,000 during the year
2018. Interest on drawings is charged at 10% per annum. Calculate interest on
drawings on 31st December, 2018.

**Solution**

**Note: **Since, date of drawings
is not given, interest is calculated for an average period of six** **months.

Under product method,
interest is calculated on the total of the products, that is, the product of
amount of drawings and the period for which the amount remained withdrawn. If
the product is calculated in terms of months, then interest is calculated on
the total of products at the rate per month. If the product is calculated in
terms of days, then interest is calculated on the total of products at the rate
per day. This method can be used in all situations as an alternative to direct
method.

The procedure for
calculating interest on drawings under product method is as follows:

a) Multiply each amount
withdrawn by the relevant period (in months) to find out the individual
product.

b) Find out the sum of all
the individual products.

c) Calculate interest at
the prescribed rate for one month by using the following formula.

Interest on drawings =
Sum of products x Rate of interest p.a. × 1/12

**Tutorial note**

If the period of
interest is taken in days, each amount withdrawn is to be multiplied by the
relevant period (in days) to find out the individual product and the following
formula is to be used to find out the interest on drawings.

Interest on drawings =
Sum of products x Rate of interest p.a. ×1/365

**Illustration 15**

Anbu is a partner in a
partnership firm. As per the partnership deed, interest on drawings is charged
at 12% p.a. During the year ended 31st December 2018 he drew as follows:

Calculate the amount of interest on drawings by using product method.

**Solution**

Calculation of interest
on drawings under product method

Interest on drawings = Sum of product x Rate of interest × 1/12

= 1,10,000 × 12/100 × 1/12

= ₹ 1,100

If the partners withdraw
fixed amount at fixed time interval, interest on drawings may be calculated on
the basis of the average period. Fixed time interval refers to withdrawal made
monthly, quarterly, half-yearly, once in 2 months and once in 4 months. The
following formula may be used to calculate interest on drawings:** **

Average period is
computed as follows:

The following table
shows the average period in months for withdrawal made at the beginning, in the
middle and at the end of every month, quarter and half-year of the year.

**Illustration 16**

John is a partner in a
firm. He withdraws ₹
1,000 p.m. regularly. Interest on drawings is charged @ 5% p.a.
Calculate the interest on drawings using average period, if he draws

i.
at the beginning of every month

ii.
in the middle of every month

iii.
at the end of every month

**Solution**

Total amount withdrawn = 1,000 × 12
= ₹ 12,000

**(i)
If drawings are made at the beginning of every month:**

Average period = 6.5

Interest on drawings = Total amount
of drawings × Rate of interest × Average period / 12

= ₹ 12,000 x 5/100 x 6.5/12

= ₹ 325

**(ii)
If drawings are made in the middle of every month:**

Average period = 6

Interest on drawings = Total amount
of drawings × Rate of interest × Average period/12

= ₹ 12,000 x 5/100 x 6/12

= ₹ 300

**(iii)
If drawings are made at the end of every month:**

Average period = 5.5

Interest on drawings = Total amount
of drawings × Rate of interest × Average period/12

= ₹ 12,000 x 5.5/100 x 6/12

= ₹ 275

**Illustration 17**

Priya and Kavitha are
partners. Priya draws ₹
4,000 at the end of each quarter. Interest on drawings
is chargeable at 6% p.a. Calculate interest on drawings for the year ending
31st December 2018 using average period.

**Solution**

Calculation of interest
on drawings of Priya (using average period)

Total amount of drawings
= 4,000 x 4 = ₹ 16,000

If drawings are made at
the end of every quarter, average period = 4.5

Interest on drawings =
Total amount of drawings × Rate of interest × Average period / 12

= ₹ 16,000 6/100 x 4.5/12 = ₹ 360

**Illustration 18**

Vennila and Eswari are
partners. Vennila draws ₹
5,000 at the beginning of each half year. Interest on drawings is chargeable at
4% p.a. Calculate interest on drawings for the year ending 31st December 2018
using average period.

**Solution**

Calculation of interest
on drawings of Vennila (using average period)

Total amount of drawings
= 5,000 × 2 = ₹ 10,000

If drawings are made at
the end of every half year, average period = 9

Interest on drawings =
Total amount of drawings × Rate of interest × Average period/12

= ₹ 10,000 x 4/100 x9/12 = ₹ 300

Tags : Accounts of Partnership Firms Fundamentals | Accountancy Accounts of Partnership Firms Fundamentals | Accountancy

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