Interest On Drawings: CUET Accounting For Partnership Firms Fundamentals

Q: What is the interest on drawings in accounting?

The interest on drawings is calculated by multiplying the total amount of drawings by the interest rate and the interest term. The interval of time between the date of the drawings and the conclusion of the accounting year is referred to as the "interest period."

Q: What is the journal entry for interest on drawings?

Drawings A/C and Interest on Drawings A/C are the two accounts included in the journal entry for interest on drawings. Interest on drawings is seen as a form of revenue for the company and is added to the company's interest account, raising the business's overall revenue.

Q: Where will you record interest on drawings?

Interest on drawings is credited to the Profit and Loss Appropriation Account as it is the firm's income. Simultaneously, it is debited to the partner's capital or current account as a charge against their capital.

Q: What is the significance of a partnership deed in accounting for a partnership firm?

A partnership deed is a legal contract outlining the terms and conditions of the partnership. It specifies profit and loss sharing ratios, interest on capital, interest on drawings, and other important details, providing a framework for accounting transactions.

Q: How to calculate interest on drawings?

There are 2 methods to calculate Interest on Drawings: the Average Period Method and the Total Product Method. The Average Period method is used <span>when a regular drawing or the same amount is withdrawn regularly. In contrast,</span> the product method involves multiplying each drawing by its period, summing up the products, and then calculating interest on the total.

Q: When is interest on drawings charged to partners?

Interest on drawings is typically charged to partners at the end of the accounting year. However, the partnership deed can specify a different charging period.

Author : Paakhi Jain

August 20, 2024

Overview: Interest on Drawings is one of the high-weightage topics in the CUET Accountancy Syllabus. It is included in the CUET Accounting For Partnership Firms Fundamentals and is easier if prepared well and equally scoring. Learn the methods, usage, and types of questions that can be seen in the exam.

One of the most easy yet difficult topics in CUET Accounting For Partnership Firms Fundamentals is: Interest on Drawings. To master this topic:

Solve numerous problems from textbooks, reference books, and previous year's question papers.
Pay attention to the language of the questions and understand the requirements clearly.

Interest on Drawings: CUET Accounting For Partnership Firms Fundamentals

Accountancy is one of the major domain subjects in the CUET Exam. The paper is for 200 marks and needs to be solved in 60 minutes.

A significant topic is the interest in drawings. Interest on Drawings is an interest made on the money that partners withdraw for personal use.

Since this interest is both a cost and an income for the company, it is taken from the partners' Capital/Current Account and credited to the company's Profit and Loss Appropriation Account.
As expressly stated in the Partnership Deed, Interest on drawings is to be charged along with the interest rate.
Interest should be levied on drawings from when the money is withdrawn until the balance sheet is prepared.
On the other hand, interest on drawings should be assessed for six months on the entire amount if no withdrawal date is specified.
This is because interest on drawings is assumed to be made evenly throughout the year.

Category of Drawings

When you prepare your CUET Accountancy interest on drawings partnership firm accounting fundamentals notes, keep in mind to highlight the fact that there are 2 categories of drawings:

Single time in a year
More than one time in a year

CUET Accounting For Partnership Firms Fundamentals: Methods of Calculating Interest on Drawings

You can only solve CUET Accounting for Partnership MCQ Questions and Answers if you know the correct formula, so learn the formula and its usage well.

In the CUET Accountancy syllabus, various techniques are described used by businesses to determine interest on drawings more than once a year. These are:

1. Average Period Method

Under this method, interest on drawing is calculated separately for each amount withdrawn by the partner from the date of such drawings till the date of the balance sheet.
This method is used when there is a regular drawing or the same amount is withdrawn regularly.

The formula used is:Interest on Drawings=Amount of Drawings×Rate of Interest/100×Average Period/12

2. Product Method

Under this method, the first step is to evaluate the product by multiplying each drawing amount by its duration.
Then, the total of all the products is used to compute the Interest on Drawings for one month.
This method is used when an unequal amount is withdrawn on different dates, i.e., irregular drawings are made.

Score 100% with CUET Accountancy Preparation Tips

The formula used is: Interest on Drawings=Total Product×Rate of Interest/100×1/12

CUET Accountancy Interest on Drawings Partnership Firm Accounting Fundamentals Questions

The type of questions from this topic that you can see in CUET previous year papers or mock tests are:

Question 1: Samar, a partner of the Ajanta partnership firm, withdrew ₹6,000 on July 1, 2023, for the year ending March 31, 2024. Calculate Interest on Drawings @ 9% p.a.

Solution:

Interest on Drawings=Amount of Drawings×Rate of Interest/100×Average period/12

Interest on Drawings=6000×9/100×9/12=₹405

Question 2: Parth, being a partner of the Ajanta partnership firm, withdrew the following amounts during the year ended on 31st March 2024.Calculate Interest on Drawings @9% p.a.

Date	Amount(₹)
May 1	6,000
July 31	3,000
September 30	4,500
November 30	6,000
January 1	4,000
March 31	3,500

Solution:

To calculate the total product, make a table:

Date	Months (Base on 31st March)	Amount(₹)	Product (₹) (Amount X Period Due in Months)
May 1	11	6,000	66,000
July 31	8	3,000	24,000
September 30	6	4,500	27,000
November 30	4	6,000	24,000
January 1	3	4,000	12,0000
March 31	0	3,500	0
-	-	27,000	1,53,000

Interest on Drawings=Total Product×Rate of Interest/100×1/12

Interest on Drawings=1,53,000×9/100×1/12=₹1147.5

Key Takeaways

While studying the concept of Interest on drawings in the CUET Accounting For Partnership Firms Fundamentals, remember:

Drawings reduce the capital of partners.
Interest on drawings is treated as an expense for the firm and a charge against the partners' capital accounts.
Use Accounting for partnership CUET notes curated by experts for a quick revision.
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