— Kishore V, SME and ACW at Edumarz
Drawings occur when a partner withdraws any sum from the business for his or her personal benefit, whether in cash or in any other form.
Interest on drawings is the interest imposed by the company on the amount of drawings.
The mechanism for computing interest on drawings is determined by the information available about the time and frequency of the partner’s drawings.
The following examples of different drawing circumstances demonstrate how to calculate the interest charged on drawings.
When a partner withdraws Rs 10,000 on July 1st and interest on withdrawals is paid at 12% per year, and the firm’s books are closed on December 31st each year, interest on drawings is Rs 600.
Interest on Drawings = Amount of Drawings * Rate of interest/100 * No.of Months/12
Int. on Drawings = 10,000 * 12/100 * 6/12 = ₹600.
Situation 2: When given information on the amount and rate of interest on cash advances,
Case I: Withdrawal amounts and rates (per year) are frequently indicated, but the date is not.
When the amount of drawings and the rate of interest on drawings (p.a.) are supplied but not the date of drawings, interest will be calculated on an average basis and the duration of the drawings will be presumed to be six months.
For instance, if a partner withdraws Rs 10,000 and the withdrawal interest rate is 12% per year, the interest on the withdrawals is Rs 600.
Int. on Drawings = 10,000 * 12/100 * 6/12 = ₹600
Case #2: While the amount and rate of interest on withdrawals are occasionally made public, the date and yearly rate of interest are not.
When a date and an interest rate are given but no per-annum interest is specified, annual interest is charged.
For example, if a partner withdraws Rs 10,000 and the interest rate is 12%, the withdrawals will earn Rs 1,200 in interest.
Int. on Drawings = 10,000 * 12/100 = ₹1,200
Situation III: When a specific quantity is regularly eliminated.
Case I: At the beginning of each month, a fixed sum is occasionally withdrawn, and the rate of interest is determined, after which the interest is computed for 6.5 months.
If a partner withdraws Rs 1,000 at the beginning of each month and the interest rate is 12% per year, the interest on the withdrawals is Rs 780.
Total amt. Of drawings = (1,000 * 12) = ₹12,000
Int. on drawings = 12,000 * 12/100 * 6.5/12 = ₹780
Case #2: When a fixed amount is removed at the end of each month and the interest rate is supplied, the interest is computed for 5.5 months.
For example, if a partner withdraws Rs 1,000 at the end of each month and the interest rate is 12% per year, the interest on the withdrawals is Rs 660.
Int. on drawings = 12,000 * 12/100 * 5.5/12 = ₹660
Case III: A fixed sum is sometimes withdrawn in the middle of each month, and the rate of interest is specified, after which the interest is computed for six months.
For example, if a partner withdraws Rs 1,000 on the 15th of every month and the interest rate is 12% p.a., the interest on the withdrawals is Rs 720.
Int. on drawings = 12,000 * 12/100 * 6/12 = ₹720
Case IV: The interest is computed for 7.5 months if a set amount is withdrawn at the start of each quarter.
For example, if a partner withdraws Rs 5,000 at the start of each quarter and the rate of interest is 12% p.a., the interest on the withdrawals is Rs 1,500.
Total amt. Of drawings = 5000 * 4 = ₹20,000
Int on drawings = 20,000 * 12/100 * 7.5/12 = ₹1,500
Case V: The interest is computed for 4.5 months if a set amount is withdrawn at the conclusion of each quarter.
For example, if a partner withdraws Rs 5,000 at the end of each quarter and the rate of interest is 12%, the interest on the withdrawals is Rs 900.
Total amt of drawings = 5000 * 4 = ₹20,000
Int. On drawings = 20,000 * 12/100 * 4.5/12 = ₹900
Situation IV: When various amounts are distributed at different periods
When a partner withdraws various amounts at different times, the interest is computed using the product approach. The drawing period is measured from the date of withdrawal until the end of the accounting year.
For example, if a partner withdraws Rs 6,000 on March 1st, Rs 4,000 on June 1st, Rs 5,000 on August 1st, and Rs 2,000 on November 30th, the rate of interest on the withdrawals is 12 per cent per annum. The firm’s fiscal year ends on December 31.
Date | Amount | Outstanding Period | Product |
March 01 | 6000 | 10 | 60,000 |
|---|---|---|---|
June 01 | 4000 | 7 | 28,000 |
August 01 | 5000 | 5 | 25,000 |
November 30 | 2000 | 1 | 2000 |
Int on drawings = Sum of product * rate/100 * 1/12
Int. on drawings = 1,15,000 * 12/100 * 1/12 = ₹1,150.