Q.Bharam is a partner in a firm. He withdraws Rs. 3,000 at the starting of each month for 12 months. The books of the firm are closed on Mar ch 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.
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Start your 14-day free trial to unlock the full solution →Interest on Bharam's drawings is ₹1,950, calculated using the average period method for monthly drawings at the beginning of each month.
Concept and Treatment: Interest on Drawings
Interest on drawings is the charge levied on a partner for withdrawing capital from the firm for personal use. It is an income for the firm and an expense for the partner. The accounting rule is: Debit the Partner's Capital/Current Account (reducing their claim) and Credit the Interest on Drawings Account (which is later transferred to the Profit and Loss Appropriation Account).
The key question is always: for how many months was each withdrawal outstanding? Since Bharam withdraws ₹3,000 at the start of each month, the first withdrawal (say, April 1) is used for the full 12 months, the second (May 1) for 11 months, and so on. The last withdrawal (March 1) is used for only 1 month.
Instead of calculating interest on each withdrawal separately, we use the Average Period Method. For monthly drawings at the beginning of each month, the average period is:
Average Period = (Total months for first withdrawal + Total months for last withdrawal) / 2
= (12 + 1) / 2 = 6.5 months
This means, on average, each withdrawal of ₹3,000 is outstanding for 6.5 months. The total drawings for the year are ₹3,000 × 12 = ₹36,000.
A common mistake is to use 6 months (the average for end-of-month drawings) instead of 6.5 months. For beginning-of-month drawings, the first withdrawal is used for 12 months, not 11, so the average is always 6.5 months, not 6.
Solution: Calculation of Interest on Drawings
Working Note 1: Total Drawings
Total Drawings = ₹3,000 × 12 months = ₹36,000
Working Note 2: Average Period
Average Period = (12 + 1) / 2 = 6.5 months
Working Note 3: Interest Calculation
Interest on Drawings = Total Drawings × Rate × (Average Period / 12)
= ₹36,000 × 10/100 × 6.5/12
= ₹36,000 × 0.10 × 0.54167
= ₹1,950
A quick shortcut: For monthly drawings at the beginning, interest = Total Drawings × Rate/100 × 6.5/12. Here, 36,000 × 10% × 6.5/12 = 36,000 × 0.10 × 0.54167 = ₹1,950.
Journal Entry
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …
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