There are three problems relating to the Interest on Drawings

(a) Rule regarding……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

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:

Either 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 or quarter, for six months or 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 drawings are made:

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 satisfied

1.       Equal amount of drawings.

2.       Equal time interval.

Check for More Posts in This Category