Interest On Drawings
Tuesday 17th of April 2012 | By: John Mcgill | Views: 222 | Comments: 0 | Rating: |
Interest on drawings is also charged like interest on capital, if it is provided in the partnership agreement. Since drawings are effected by partners often in irregular amounts and on varying dates, it is considered advisable to calculate interest on drawings to adjust the rights of partners. It many cases, however, drawings are made by mutual agreement and no interest is charged at all.
Where interest is charged it is usually calculated at fixed rate percent from the date of each drawing to the date the accounts are closed. If the dates on which the amounts are drawn is not given interest is calculated on the whole amount on the assumption that the money was drawn evently throughout the year. The amount of interest is debited to partners drawings accounts and is credited to the interest on drawings account. At the close of the accounting period the interest on drawings account is closed by transfer to the profit and loss account.
It may, however, be noted that if the withdrawals are of uniform amount and are made at regular intervals, then interest on drawings can be calculated on the total of the amount drawn, for the average of the periods applicable to first and last installment. Therefore, if drawings are made at the beginning of each month, interest should be calculated on the whole amount for 6 months. If drawings .are made at the end of each month, interest should be calculated on whole amount for 5 months. If drawings are made at the middle of each month, interest should be calculated on the whole amount for 6 months.