CALCULATION OF INTEREST ON DRAWINGS

 PARTNERSHIP ACCOUNTING

PARTNERSHIP FUNDAMENTALS

CALCULATION OF INTEREST ON DRAWINGS

Drawings by a partner may be broadly divided into:

1.   Irregular Drawings:  It means drawings of the same amount or different amount at irregular intervals. (product method is followed)

2.   Regular drawings: It means drawings of the same amount at regular intervals.  (Average period method is followed)

 

1.   Product Method :

(a)           Simple method

(b)          Product method

When unequal amount is withdrawn at different dates or when there are irregular drawings, interest on drawings is calculated with the help of Simple method or Product Method.

(a)           Simple Method:

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

(b)          Product Method:

Under this Method, the amount of Drawings is multiplied with the number of months or number of days (as the case is) it is drawn. The Product so obtained is totalled and interest is calculated thereon for one month.

Illustration 1.   Calculation of interest on Drawings by simple method and product method.

In a partnership, Partners are charged interest on Drawings@ 15%p.a. during the year ended 31st March 2021, a partner withdrew as follows.

Date                              Drawings

1st May 2020                 2,000

1st Aug 2020                  5,000

30th Sep 2020                2,000

31st Jan 2021                 6,000

31st Mar 2021                2,000

 

What is the interest chargeable from the Partner?

Solution:

 

(a)           Simple Method

 

Date                                     Amount          No. of Months upto 31st Mar2021           Interest @15%

 

1st may 2020    2,000             11                                     *275

1st Aug 2020     5,000              8                                         500

30th Sep 2020   2,000              6                                         150 

31st Jan 2021     6,000             2                                          150

31st Mar 2021    2,000             0                                            0

TOTAL INTEREST                                                                       1075

*Interest Calculations

 2000*15/100*11/12 =275

5,000*15/100*8/12 = 500

2,000*15/100*6/12= 150

6,000*15/100*2/12 = 150

                                         =0

(b)          Product Method

 

Date                                     Amount          No. of Months upto 31st Mar2021           Product

A            B                 C                             D=B*C                     

1st may 2020    2,000             11                            22,000         

1st Aug 2020     5,000              8                            40,000                                

30th Sep 2020   2,000              6                             12,000            

31st Jan 2021     6,000             2                              12,000           

31st Mar 2021    2,000             0                                 0          

TOTAL PRODUCT                               86,000  

 


INTEREST CALCULATION

86,000*15/100*1/12 =   1075

 

 

 

 


AVERAGE PERIOD METHOD

This method is used when there is regular drawings or when:

(a)           The amount of Drawings is uniform and

(b)          The time interval between the two Drawings is also uniform.

Interest on Drawings = Total Drawings*Rate of interest/100*Average period/12

 

 

 

 

 

 

Average Period = Months Left after First Drawing + Months Left after Last Drawing/2

MONTHS

REGULAR DRAWINGS AT MONTHLY INTERVALS

 

We have almost 9 different situations for calculating interest on Drawings under the AVERAGE PERIOD METHOD.

 

Situation 1.

 

If a Partner withdraws Fixed Amount in the beginning of every month, interest is charged on the whole amount for 6.5 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *6.5/12

Average Period = 12 Months + 1 Month/2 = 6.5 Months

 

ILLUSTRATION 1.

A partner Draws Rs. 10,000 per month. Under the partnership deed, interest on Drawings is to be charged @ 15% p.a. Calculate interest if the Drawings are made regularly in the beginning of the Month.

Solution:                               

 Apr      *--------------------

 

May       *---------------------

 


June       *----------------------

 

July         *----------------------

 

Aug         *-----------------------

 

Sep          *------------------------

 

Oct            *------------------------

 

Nov             *------------------------

 

Dec              *-------------------------

 

Jan                *-------------------------

 

Feb            *--------------------------

 

Mar             *----------------------------

 

Total Drawings = 10000 * 12 = 1,20,000

Average period = 12 Months + 1 Month/2 = 6.5 months

Interest on Drawings = 1,20,000*15/100*6.5/12 = Rs. 9,750

 

 

 

 

 

 

 

 


 

Situation 2.

 

If a Partner withdraws Fixed Amount in the middle of every month, interest is charged on the whole amount for 6 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *6/12

Average Period = 11.5 Months + .5 Month/2 = 6 Months

 

 

 

 

 

ILLUSTRATION 2.

A partner Draws Rs. 10,000 per month. Under the partnership deed, interest on Drawings is to be charged @ 15% p.a. Calculate interest if the Drawings are made regularly in the middle of the Month.

Solution:                               

 Apr      ---------*------------

 

May       ---------*------------

 


June       ---------*-------------

 

July         ----------*------------

 

Aug         ----------*-------------

 

Sep          -----------*-------------

 

Oct            -----------*-------------

 

Nov             -----------*-------------

 

Dec              ------------*-------------

 

Jan                -------------*------------

 

Feb            --------------*------------

 

Mar           --------------*--------------

 


Total Drawings = 10000 * 12 = 1,20,000

Average period = 11.5 Months + .5 Month/2 = 6 months

Interest on Drawings = 1,20,000*15/100 * 6/12 = Rs. 9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Situation 3.

 

If a Partner withdraws Fixed Amount at the end of every month, interest is charged on the whole amount for 5.5 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *5.5/12

 

 

 

Average Period = 11Months + 0 Month/2 = 5.5 Months

 

 

 

 

 

ILLUSTRATION 3.

A partner Draws Rs. 10,000 per month. Under the partnership deed, interest on Drawings is to be charged @ 15% p.a. Calculate interest if the Drawings are made regularly at the end of the Month.

Solution:                               

 Apr      ----------------------*

 

May       ----------------------*

 


June       -----------------------*

 

July         -----------------------*

 

Aug         ------------------------*

 

Sep          -------------------------*

 

Oct            -------------------------*

 

Nov             -------------------------*

 


Dec              --------------------------*

 

Jan                --------------------------*

 

Feb            ---------------------------*

 

Mar           -----------------------------*

 

 


Total Drawings = 10000 * 12 = 1,20,000

Average period = 11 Months + 0 Month/2 = 5.5 months

Interest on Drawings = 1,20,000*15/100 * 5.5/12 = Rs. 8,250

 

 

 

 

QUARTERS

REGULAR DRAWINGS AT QUARTERLY INTERVALS

 


Situation 4.

 

If a Partner withdraws Fixed Amount in the beginning of each quarter, interest is charged on the whole amount for 7.5 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *7.5/12

 

 

 

Average Period = 12Months + 3 Month/2 = 7.5 Months

 

 

 

 

 


ILLUSTRATION 4.

A partner Draws Rs. 60,000 in the beginning of each quarter. Under the partnership deed, interest on Drawings is to be charged @ 10% p.a. Calculate interest.

 

 

 

Solution:                               

 Apr      *----------------------

 

May       ----------------------

 

June       -----------------------

 


July         *-----------------------

 

Aug         ------------------------

 

Sep          -------------------------

 

Oct            *-------------------------

 

Nov             -------------------------

 

Dec              --------------------------

 

Jan                *--------------------------

 

Feb                  ---------------------------

 

Mar                -----------------------------

 

 

 

Total Drawings = 60,000 * 4 = 2,40,000

Average period = 12 Months + 3 Month/2 = 7.5 months

Interest on Drawings = 2,40,000*10/100 * 7.5/12 = Rs.15,000

 

 

 


Situation 5.

 

If a Partner withdraws Fixed Amount in the middle of each quarter, interest is charged on the whole amount for 6 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *6/12

 

 

 

Average Period = 10.5Months + 1.5Month/2 = 6Months

 

 

 

 

 

ILLUSTRATION 5.

A partner Draws Rs. 60,000 in the middle of each quarter. Under the partnership deed, interest on Drawings is to be charged @ 10% p.a. Calculate interest.

 

 

 

Solution:                               

 Apr      ----------------------

 

May       -----------*-----------

 


June       -----------------------

 


July         ----------------------

 

Aug         -----------*-------------

 

Sep          -------------------------

 

Oct            -------------------------

 

Nov             -----------*--------------

 


Dec              --------------------------

 

Jan                --------------------------

 

Feb                  ------------*---------------

 

Mar                -----------------------------

 

 

 


Total Drawings = 60,000 * 4 = 2,40,000

Average period = 10.5Months + 1.5 Month/2 = 6 months

Interest on Drawings = 2,40,000*10/100 * 6/12 = Rs.12,000

 

 

 

 

 


Situation 6.

 

If a Partner withdraws Fixed Amount in the end of each quarter, interest is charged on the whole amount for 4.5 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *4.5/12

 

 

 


Average Period = 9Months + 0Month/2 = 4.5Months

 

 

 

 

 

ILLUSTRATION 6.

A partner Draws Rs. 60,000 in the end of each quarter. Under the partnership deed, interest on Drawings is to be charged @ 10% p.a. Calculate interest.

 

 

 

Solution:                               

 Apr      ----------------------

 

May       ----------------------

 

June       -----------------------*

 


July         ----------------------

 

Aug         ------------------------

 

Sep          -------------------------*

 

Oct            -------------------------

 

Nov             -------------------------

 

Dec              --------------------------*

 

Jan                --------------------------

 

Feb                  ---------------------------

 


Mar                -----------------------------*

 

 

 

Total Drawings = 60,000 * 4 = 2,40,000

Average period = 9Months + 0 Month/2 = 4.5 months

Interest on Drawings = 2,40,000*10/100 * 4.5/12 = Rs.9,000

 

 

 

 

 

Situation 7

 

IF FIXED AMOUNT IS WITHDRAWN DURING 6 MONTHS.

(a)           IN THE BEGINNING OF EACH MONTH.

(b)          IN THE MIDDLE OF EACH MONTH.

(c)            AT THE END OF EACH MONTH.

 

(a)           In the Beginning of each Month

Interest on Drawings    = Total Drawings*Rate/100*3.5/12

 

 

 

 

 

Solution:                               

 Apr     * ----------------------

 

May       *----------------------

 

June       *-----------------------

 


July         *----------------------

 

Aug         *------------------------

 

Sep          *-------------------------

 

 

 

 

If a Partner withdraws Fixed Amount in the beginning of each months for six months only, interest is charged on the whole amount for 3.5 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *3.5/12

 

 

 


Average Period = 6Months + 1Month/2 = 3.5Months

 

(b)          In the Middle of each month

 

Interest on Drawings    = Total Drawings*Rate/100*3/12

 

 

 


Solution:                               

 Apr      ----------*------------

 

May       ---------*-------------

 

June       ----------*-------------

 


July         ----------*------------

 

Aug         ---------*---------------

 

Sep          ----------*---------------

 

If a Partner withdraws Fixed Amount in the middle of each month for six months only, interest is charged on the whole amount for 3 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *3/12

Average Period = 5.5Months + .5Month/2 = 3Months

 


(c)            In the End of each month

 

Interest on Drawings    = Total Drawings*Rate/100*2.5/12

 

 

 


Solution:                               

 Apr      ----------------------*

 

May       ----------------------*

 

June       -----------------------*

 


July         ----------------------*

 

Aug         -----------------------*

 

Sep          -------------------------*

 

If a Partner withdraws Fixed Amount at the end of each month for six months only, interest is charged on the whole amount for 2.5 months.

Interest on Drawings = Total Drawings * Rate of Interest/100 *2.5/12

Average Period = 5Months +0Month/2 = 2.5Months

 

 


ILLUSTRATION NO.7

WHEN DRAWINGS ARE MADE ONLY FOR 6 MONTHS WHETHER IN THE BEGINNING OF EACH MONTH, IN THE MIDDLE OF EACH MONTH OR AT THE END OF EACH MONTH FOR 6 MONTHS ONLY.

 

A, B and C started a firm on 1st October,2020 sharing profits equally. A drew regularly Rs.4,000 in the beginning of every month for the six months ended 31st March 2021. B drew regularly Rs.4,000 at the end of every Month for the six months ended 31st March2021. C drew regularly Rs.4,000 in the middle of every month for the six months ended 31st March2021.

Calculate interest on Drawings @ 5%p.a. for the period ended 31st March 2021.

 

Solution:

Total Drawings of each partner = 4,000*6 = 24,000

                             

                                        Case 1                      Case 2                          Case 3

                                     (beginning)                (End)                             (Middle)

Average Period       ( 6 + 1)months =3.5 months           (5 +0)months= 2.5months              ( 5.5+0.5)months=3months

 

Interest on Drawings 24,000*5/100*3.5/12     24,000*5/100*2.5/12             24,000*5/100*3/12

                                               = Rs. 350               Rs. 250                      Rs.300

 

 

 

 

 

Situation 8:

If the date of withdrawal is not given, interest on Total Drawings for the year is calculated for six months on the average basis.  

 

ILLUSTRATION 8:

Calculate interest on drawings of Rakesh @10% p.a. for the year ended 31st March,2020 in each of the following alternative cases:

Case 1. If his drawings during the year were Rs.30,000

Case 2. If he withdraws Rs.2,500 per month during the year.

 

Solution:

Case 1:

Interest on Drawings = 30,000*10/100*6/12 = Rs. 1500

 

Case 2:

Total Drawings = Rs.2500 *12 = 30,000

 

Interest on Drawings = 30,000*10/100*6/12 = Rs.1500

 

 

 

 

Situation 9:

When the rate of interest is given without the word ‘per annum’(p.a.), Interest is charged without considering the time factor.

 

Illustration 9:

Calculate interest on A’s drawings @10% If he withdrew Rs.2,50,000 during the year.

Solution:

Interest on Drawings = Rs.2,50,000 *10/100 = 25,000

 

The journal entries to record Interest on Drawings are:

 

Fluctuating                                                         Fixed

 


1.Partner’s capital A/c                Dr.                                                                   Partner’s Current A/c     Dr.  

       To interest on Drawings A/c                                                                                   To Interest on Drawings A/c

(Interest charged on partner’s Drawings)                                               (Interest charged on partner’s Drawings)     

 

2.Interest on Drawings A/c         Dr.                                                            2.Interest on Drawings A/c         Dr.

       To Profit and Loss Appropriation A/c                                                          To Profit and Loss Appropriation A/c                                                                                                                              

(Interest on Drawings transferred to Profit                                         (Interest on drawings Transferred to profit  

And loss Appropriation A/c)                                                                       and loss Appropriation a/c)

 

 

 

 

 

 

 








 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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