Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are Rs. 2,000 each

Numerical Questions · Q26

Q. Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are Rs. 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon's drawings for the year 2006, assuming that money is withdrawn:

(i) in the beginning of every month,

(ii) in the middle of every month, and

(iii) at the end of every month.

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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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For a partner who withdraws a fixed amount at regular intervals, interest on drawings is calculated using the average period method. The formula is:

Interest on Drawings = Total Drawings \times Rate \times (Average Period / 12)

Since Menon and Thomas share profits equally, we only need Menon’s figures. Monthly drawing = ₹2,000, so total drawings for the year = ₹2,000 × 12 = ₹24,000. Rate = 10% p.a.

The average period depends on when the money is withdrawn each month:

Case	Timing of withdrawal	Average period (months)	Working
(i)	Beginning of every month	6.5	(12 + 1) / 2
(ii)	Middle of every month	6.0	(11.5 + 0.5) / 2
(iii)	End of every month	5.5	(11 + 0) / 2

Now compute interest for each case:

(i) Beginning of every month …

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Interest on Menon's drawings at 10% p.a. for 2006: (i) Beginning of each month = ₹1,300;

(ii) Middle of each month = ₹1,200;

(iii) End of each month = ₹1,100.

The core concept here is Interest on Drawings — a charge levied by the firm on partners for withdrawing money from the business before the year-end. It compensates the firm for the temporary loss of capital. The accounting rule is simple: Interest on Drawings is a gain for the firm (credited to the Profit and Loss Appropriation Account) and a loss for the partner (debited to the Partner’s Capital Account). The journal entry is:

Debit: Partner’s Capital Account (Menon)
Credit: Interest on Drawings Account (which is then transferred to the Profit and Loss Appropriation Account)

The tricky part is the time period for which interest is charged. Since drawings are made monthly, the average period for which the money is used by the partner depends on when in the month the withdrawal occurs. The formula for total interest on monthly drawings of equal amount is:

Total Interest = Total Drawings × Rate × (Average Period / 12)

Where the Average Period (in months) is:

Beginning of each month: 6.5 months (because the first withdrawal is used for 12 months, the last for 1 month; average = (12+1)/2 = 6.5)
Middle of each month: 6 months (average = (11.5+0.5)/2 = 6)
End of each month: 5.5 months (average = (11+0)/2 = 5.5)

Let’s apply this to Menon’s case. His monthly drawing is ₹2,000, so total drawings for the year = ₹2,000 × 12 = ₹24,000. Rate = 10% p.a.

Working Notes

Case (i): Beginning of every month

Average period = 6.5 months

Interest = 24,000 × 10/100 × 6.5/12

= 24,000 × 0.10 × 0.54167

= 24,000 × 0.054167

= ₹1,300

Case (ii): Middle of every month

Average period = 6 months

Interest = 24,000 × 10/100 × 6/12

= 24,000 × 0.10 × 0.5

= ₹1,200

Case (iii): End of every month

Average period = 5.5 months

Interest = 24,000 × 10/100 × 5.5/12

= 24,000 × 0.10 × 0.45833

= ₹1,100

Watch out

A common mistake is to use the wrong average period. For beginning of month, students often mistakenly use 6 months (as if it were middle). Remember: beginning-of-month drawings are used for a longer average time, so interest is higher. End-of-month drawings are used for the shortest average time, so interest is lowest.

Tip

You can also calculate interest on each month’s drawing individually and sum them — it’s longer but foolproof. For example, for beginning-of-month: Jan drawing used for 12 months → interest = 2,000 × 10% × 12/12 = ₹200; Feb drawing used for 11 months → 2,000 × 10% × 11/12 = ₹183.33; … Dec drawing used for 1 month → ₹16.67. Sum = ₹1,300. The average-period formula is a shortcut that works only when all monthly drawings are equal.

Journal Entry (Illustrative for Case (i))

The journal entry for charging interest on drawings is the same in all three cases, only the amount changes.

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2006 Dec 31	Menon’s Capital A/c Dr.		1,300
	To Interest on Drawings A/c			1,300

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Q.Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are Rs. 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon's drawings for the year 2006, assuming that money is withdrawn:

Working Notes

Journal Entry (Illustrative for Case (i))

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