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Q.'A' and 'B' were partners in a firm sharing profits and losses in the ratio of 7 : 1. 'A' withdrew a fixed amount of ₹ 12,000 at the beginning of each quarter. Interest on drawings is charged @ 6% p.a. The journal entry for charging interest on drawings at the end of the year will be : (A) Interest on drawings A/c Dr. ₹ 1,800 To A's Capital A/c ₹ 1,800 (B) Interest on drawings A/c Dr. ₹ 1,800 To A's Current A/c ₹ 1,800 (C) A's Capital A/c Dr. ₹ 1,800 To Interest on drawings A/c ₹ 1,800 (D) Profit and Loss Appropriation A/c Dr. ₹ 1,800 To Interest on drawings A/c ₹ 1,800

CBSECBSE Class XII Board 2023MCQ· 1mImportance★★★★★
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Partner A's Capital A/c is debited and Interest on Drawings A/c is credited with ₹1,800; the correct entry is (C).

Concept: Interest on Drawings

When a partner withdraws money from the firm during the year, the firm loses the use of that capital. To compensate, interest on drawings is charged to the partner. This interest is an income for the firm and a loss for the withdrawing partner.

The accounting treatment follows the golden rule for personal accounts: Debit the receiver, Credit the giver. Here, the partner (A) has effectively "received" a benefit by withdrawing funds, so we debit the partner's account. The firm gains interest income, which is credited to Interest on Drawings A/c.

The Entry Structure

At the end of the year, when interest on drawings is charged:

Partner's Capital A/c Dr.

To Interest on Drawings A/c

This entry reduces the partner's capital (debit) and records the firm's income from interest (credit). The Interest on Drawings A/c will later be transferred to the credit side of the Profit and Loss Appropriation Account, increasing the distributable profit.

Watch out

A common mistake is to debit "Interest on Drawings A/c" — that would mean interest is an expense, which is incorrect. Interest on drawings is income for the firm, so it must be credited.

Solution

Working Note 1: Calculation of Interest on Drawings

A withdraws ₹12,000 at the beginning of each quarter (four times a year).

When drawings are made at the beginning of each period at equal intervals, the average period for which interest is calculated is:

Average Period=Total time period+Time after last drawing2\text{Average Period} = \frac{\text{Total time period} + \text{Time after last drawing}}{2}

For quarterly drawings at the beginning:

  • First drawing (beginning of Q1): outstanding for 12 months
  • Second drawing (beginning of Q2): outstanding for 9 months
  • Third drawing (beginning of Q3): outstanding for 6 months
  • Fourth drawing (beginning of Q4): outstanding for 3 months

Average period = 12+9+6+34=304=7.5\frac{12 + 9 + 6 + 3}{4} = \frac{30}{4} = 7.5 months

Alternatively, using the formula for drawings at the beginning of each period:

Average Period=n+12×time interval\text{Average Period} = \frac{n + 1}{2} \times \text{time interval}

where n=4n = 4 quarters and time interval = 3 months

=4+12×3=52×3=7.5 months= \frac{4 + 1}{2} \times 3 = \frac{5}{2} \times 3 = 7.5 \text{ months}

Total Drawings = ₹12,000 × 4 = ₹48,000

Interest on Drawings = 48,000×6×7.5100×12=48,000×6×7.51,200=2,160,0001,200=₹1,800\frac{48,000 \times 6 \times 7.5}{100 \times 12} = \frac{48,000 \times 6 \times 7.5}{1,200} = \frac{2,160,000}{1,200} = ₹1,800

Journal Entry

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |

|------|-------------|------|-----------|------------| …

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