karnataka class 12 commerce Accountancy Interest on partners drawings

karnataka class 12 commerce Accountancy Interest on partners drawings

karnataka class 12 commerce Accountancy Interest on partners drawings :- we will provide complete details of karnataka class 12 commerce Accountancy Interest on partners drawings in this article.

karnataka class 12 commerce Accountancy Interest on partners drawings

Interest on drawings

Charging interest on drawings is a means of discouraging partners from withdrawing excessive amounts from the business. From this, it follows that

interest on drawings is a debit entry in the partners’ current accounts and a credit entry in the Appropriation Account.

Depending on what the question is testing, it will either provide the amounts of interest on capital and drawings or give details of how to calculate the amounts.

Remember to deal with each of these appropriations before sharing the residual profit between the partners.

A final point in this context is that, if the total of the appropriations is greater than the profit for the year, the amount to be shared between the partners will be a loss. This will mean that the entries for the share of the residual profit will be a credit in the Appropriation Account (thus resulting in a nil balance) and debits in the partners’ current accounts.

karnataka class 12 commerce Accountancy Interest on partners drawings

Whenever partners withdrew money from the partnership firm for their private purpose it could be termed as drawings. The drawings could be of following nature:
1. Drawings against salary or commission
2. Drawings against interest on capital
3. Drawing against share of profits etc.

karnataka class 12 commerce Accountancy Interest on partners drawings

It should be noted that the provisions of drawings must be laid down in the partnership deed. When any partner withdraws money then that amount will be debited to his/her drawings account or current account and is credited to cash/bank account. To close the partners drawing account, they are transferred to partners capital account or partners current account at the end of the year by passing the following entry:

Fluctuating Capital Method
Partners’ capital A/C…………….Dr.
To Partners drawings A/C

Fixed Capital Method
Partners’ current A/C……………Dr.
To partners’ drawings A/C

Interest On Drawings
Interest on drawing is an income of the partnership firm and is credited to profit and loss appropriation account.
On charging interest on drawings
Partners’ capital A/C……………….Dr.
To interest on drawings A/C

To close the interest on drawings
Interest on drawings A/C………………….Dr.
To profit and loss appropriation A/C

karnataka class 12 commerce Accountancy Interest on partners drawings :-Interest on Drawing 

When a partner withdraws cash from the firm for domestic use, the withdrawal of cash is termed as drawings. If the partnership deed has a provision of charging interest on drawings, the firm may charge interest on drawings from partners. Interest on drawing is a gain for the firm. It is calculated at the agreed rate. The amount of interest on drawings will be credited to Profit and Loss Appropriation Account and will be debited to partner’s capital account/current account (Individually). The journal entry will be:

Partners Capital/Current A/c                                   Dr.

To Interest on Drawings A/c

(Charging interest on drawings to Partner’s Capital account)

karnataka class 12 commerce Accountancy Interest on partners drawings :-Calculation of interest on Drawings :

There are two methods of calculating interest on drawings

• Simple Average method
•  Product method

1. SIMPLE AVERAGE METHOD

A fixed amount may be withdrawn every month/ half yearly/ annually. The interest has to be calculated for the period for which the amount has been utilised for personal purposes by the partners. The calculation of amount of interest to be charged in different situations is shown as under :

1. When Fixed Amounts are Withdrawn at Equal Time Intervals

A fixed amount is withdrawn by the partners, at equal time interval, say each month or each quarter. The calculation of total time period, in such situations will depend upon whether the money was withdrawn at the beginning of the month, middle of the month or at the end of the month.

For example, Mohan withdrew 1,000 per month from the firm for her personal use during the year ending December 31, 2013. interest is charged at the rate of 12% per annum. The calculation of average period and the interest on drawings in different situations would be as follows

When money is withdrawn at the beginning of the period

Total 12000

Period 78

When money is withdrawn in the beginning of the month, the average period is calculated as under

Average period = Total number of month /12

78/12

6.5

Or 

Average period = Max period of drawing + Min period of drawing /2

12 + 1  =13/2

= 6.5

Interest on drawing = 12000 X 12/100 X 6.5 / 12

= 780

When money is withdrawn in the end of the month:

When money is withdrawn at the end of the month, the average period is calculated as under:

Average Period            =          Total of months/12

=          66 months/12

=          5 ½ months

OR,

Max. Period of Drawing + Min. Period of Drawing

Average Period =

11 + 0  =11/2= 5.5

Interest on Drawings = 12,000 x12/100 X 5.5/2

= 660

When money is withdrawn at the middle of month:

When money is withdrawn in the middle of the month, the average period is calculated as under:

Average Period = Total of months/12

= 72 months/12

= 6 months

OR,
Max. Period of Drawing + Min. Period of Drawing
Average Period = 2

= 11.5 + 0.5 = 12 = 6 months
2 2

Interest on Drawings = 12,000 x 10012 x 126
= 720

karnataka class 12 commerce Accountancy Interest on partners drawings

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karnataka class 12 commerce Accountancy Interest on partners drawings

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