Illustrate how interest on drawings will be calculated under various situations.
Solution
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.
Interest on drawings = `"Total Amount" xx ("Rate of Interest")/100 xx "Period"/12`
Interest on drawings = `10000 xx 10/100 xx 8/12 = "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
Interest on drawings `= 10000 xx 10/100 xx 6/12 = 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.
Interest on drawings`= 20000 xx 10/100 = "Rs"2000`
Situation 3: When a fixed amount is withdrawn at regular interval
Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is calculated for 6.5 months.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`= 12000 xx 10/100 xx 6.5/12 = 650`
Case II: If a fixed amount is withdrawn at the end of each month, then the interest is calculated for 5.5 months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.
Interest on drawings`= 12000 xx 10/100 xx 5.5/12 = "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.
Interest on drawings`= 12000 xx 10/100 xx 6/12 = "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
Interest on drawings`= 12000 xx 10/100 xx 7.5/12 = "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.
Interest on drawings`= 12000 xx 10/100 xx 4.5/12 = "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 





94000 
Interest on Drawings`= "Sum of product" xx "Rate"/100 xx 1/12`
Interest on Drawings`= 94000 xx 10/100 xx 1/12 = 783.33`