Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of ₹40,000 and ₹30,000, respectively. They withdrew from the firm the following amounts, for their personal use: | Rakesh | Month | ₹ | |---|---|---:| | | May 31, 2019 | 600 | | | June 30, 2019 | 500 | | | August 31, 2019 | 1,000 | | | November 1, 2019 | 400 | | | December 31, 2019 | 1,500 | | | January 31, 2020 | 300 | | | March 01, 2020 | 700 | | Rohan | At the beginning of each month | 400 | Interest on drawings is to be charged @ 6% p.a. Calculate interest on drawings, assuming that books of accounts are closed on March 31, 2020, every year.

Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of ₹40,000 and ₹30,000, resp

Numerical Questions · Q20

Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of ₹40,000 and ₹30,000, respectively. They withdrew from the firm the following amounts, for their personal use:

Rakesh	Month	₹
	May 31, 2019	600
	June 30, 2019	500
	August 31, 2019	1,000
	November 1, 2019	400
	December 31, 2019	1,500
	January 31, 2020	300
	March 01, 2020	700
Rohan	At the beginning of each month	400

Interest on drawings is to be charged @ 6% p.a. Calculate interest on drawings, assuming that books of accounts are closed on March 31, 2020, every year.

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Concept understanding — Interest on Drawings

Interest on Drawings – A First Look

Think of a partnership firm as a shared pool of money. Each partner owns a part of that pool, but the firm needs that money to run its business. When a partner takes money out for personal use — buying a car, paying school fees, a holiday — that money is no longer available to the firm. The firm could have earned a return on that money if it had stayed in the business. So the partner is, in effect, borrowing from the firm.

Interest on Drawings is the charge the firm levies on a partner for that personal withdrawal. It compensates the firm for the loss of use of that capital.

The precise meaning

Drawings are any amounts or goods taken by a partner from the firm for personal use. Interest on Drawings is the interest charged by the firm on those drawings. It is an income for the firm and an expense for the partner.

The logic is simple: if the partner had left that money in the firm, the firm could have invested it and earned a return. By taking it out, the partner reduces the firm's capital base. Interest on Drawings restores some of that lost earning potential.

Why does it matter?

In a partnership, profits are shared according to an agreed ratio. But if one partner draws heavily and another draws little, the heavy drawer has effectively used more of the firm's resources. Without interest on drawings, that partner would unfairly benefit — the firm's profit would be lower because less capital was available, and all partners would share that reduced profit equally. Interest on drawings corrects this inequity.

It also encourages partners to withdraw only what they genuinely need, keeping more capital inside the firm for growth.

The accounting treatment

Interest on Drawings is recorded in two steps:

When interest is charged – The firm recognises it as income. The journal entry is:

Partner’s Capital Account (or Current Account) … Dr

To Interest on Drawings Account

The partner’s capital (or current) account is debited because the partner owes this amount to the firm. Interest on Drawings is credited because it is income for the firm.
At the end of the year – The Interest on Drawings Account is closed by transferring its balance to the Profit and Loss Appropriation Account:

Interest on Drawings Account … Dr

To Profit and Loss Appropriation Account

This increases the firm’s profit available for distribution.

Where does it appear in the final accounts?

Interest on Drawings appears in two places:

On the credit side of the Profit and Loss Appropriation Account – as an addition to the net profit.
On the debit side of the Partner’s Capital Account (or Current Account, if the firm maintains separate current accounts).

The NCERT textbook shows the following format for the Profit and Loss Appropriation Account:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Net Profit (transferred)	xxx	By Net Profit (as per P&L)	xxx
To Interest on Capital	xxx	By Interest on Drawings	xxx
To Salary to Partner	xxx
To Commission to Partner	xxx
To Profit transferred to:
– A’s Capital A/c	xxx
– B’s Capital A/c	xxx
Total	xxx	Total	xxx

And in the Partner’s Capital Account (or Current Account), interest on drawings appears on the debit side:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Drawings	xxx	By Balance b/d	xxx
To Drawings	xxx	By Interest on Capital	xxx

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We first calculate interest on Rakesh’s drawings using the product method, because his withdrawals are at irregular dates. For each withdrawal, we find the number of months from the date of withdrawal to the closing date (March 31, 2020). Interest is charged at 6% p.a.

Rakesh’s Drawings – Product Calculation

Date	Amount (₹)	Months to March 31, 2020	Product (Amount × Months)
May 31, 2019	600	10	6,000
June 30, 2019	500	9	4,500
August 31, 2019	1,000	7	7,000
November 1, 2019	400	5	2,000
December 31, 2019	1,500	3	4,500
January 31, 2020	300	2	600
March 1, 2020	700	1	700
Total	5,000		25,300

Interest = Total Product × (Rate / 12) × (1/100)

= 25,300 × (6 / 12) × (1/100)

= 25,300 × 0.5 × 0.01

= 25,300 × 0.005

= ₹126.50

Rohan’s Drawings – Fixed Amount at Beginning of Each Month …

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Interest on Rakesh's drawings is ₹126.50 and on Roshan's drawings is ₹156, calculated using the product method for irregular withdrawals and the average period formula for fixed monthly withdrawals.

Concept First: Why Interest on Drawings is Charged

When partners withdraw money from the firm for personal use, the firm loses the use of that capital. Interest on drawings compensates the firm for this loss. It is a charge against profits — meaning it is calculated regardless of whether the firm makes a profit or loss. The entry is:

Debit the Partner's Capital/Current Account (reducing their claim on the firm)
Credit the Profit and Loss Appropriation Account (increasing the profit pool to be shared)

The key rule: Interest is calculated for the period the money is withdrawn until the end of the accounting year. For irregular withdrawals (different amounts on different dates), we use the Product Method — multiply each withdrawal by the months remaining in the year, sum the products, and apply the annual rate. For fixed monthly withdrawals, we use the Average Period formula.

Solution: Step-by-Step Calculation

Working Note 1: Interest on Rakesh's Drawings (Irregular Withdrawals)

Rakesh withdrew on different dates. The accounting year ends on March 31, 2020. We calculate the period from each withdrawal date to March 31, 2020.

Date	Amount (₹)	Months to March 31, 2020	Product (Amount × Months)
May 31, 2019	600	10 (June to March)	6,000
June 30, 2019	500	9 (July to March)	4,500
August 31, 2019	1,000	7 (Sept to March)	7,000
November 1, 2019	400	5 (Nov to March)	2,000
December 31, 2019	1,500	3 (Jan to March)	4,500
January 31, 2020	300	2 (Feb to March)	600
March 1, 2020	700	1 (March)	700
Total	5,000		25,300

Watch out

A common mistake is counting the month of withdrawal as a full month. Here, we count from the next month after withdrawal to March 31. For example, May 31 withdrawal: June to March = 10 months, not 11.

Interest = Total Product × (Rate / 12) × (1/100)

Interest = 25,300 × (6 / 12) × (1/100)

Interest = 25,300 × 0.5 × 0.01

Interest = 25,300 × 0.005

Interest = ₹126.50 …

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Concept First: Why Interest on Drawings is Charged

Solution: Step-by-Step Calculation

Working Note 1: Interest on Rakesh's Drawings (Irregular Withdrawals)

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