Interest on Drawings - Three issues
(a) Rule ……whether to charge or not (as already discussed).
(b) Treatment…………Journal entries and Ledger accounts (as already discussed).
(c) Calculation………The amount of Interest on Drawings (now being discussed).
Calculation of Interest on Drawings
1. When date of drawings is given:
Interest on Drawings is calculated using the simple interest formula. (Like Interest on Capital).
2. When date of Drawings is not given:
Interest on Drawings is to be calculated using simple interest formula for six months. (Like Interest on Capital).
3. When unequal amount of drawings is made at different points of time:
Use Simple method be used separately and then add the Interest on Drawings
or
Product method may be used (Like Interest on Capital)
4. When same amount of drawings is made at regular time intervals:
Short cut method may be used, whether the drawings are made at the beginning, in the middle or at the end
of
the month / quarter / six months / the whole year.
Interest on Drawings = (Total Drawings*Rate*Average Months)/1200
Average Months = (Months left after first Drawings + Months left after last Drawings)/2
Average months in different cases:
When Partners make drawings :
1. In the beginning of every month for full year--------6.5 months
2. In the middle of every month for full year---------------6 months
3. At the end of every month for full year----------------5.5 months
4. In the beginning of every month for six months----3.5 months
5. In the middle of every month for six months----------3 months
6. At the end of every month for six months-----------2.5 months
7. In the beginning of every quarter (for full year) -- 7.5 months
8. In the middle of every quarter (for full year) ---------6 months
9. At the end of every quarter (for full year) ---------- 4.5 months
Note: For the application of Short Cut Method two conditions must be present
1. Equal amount of drawings.
2. Equal time interval.
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