Drawings mean the amount withdrawn by the
partners, in cash or kind for personal purposes and interest on drawings is to
charge form the partners if the partnership agreement provides for the same.
Methods
of calculating interest on drawings:
1.
Simple Interest Method.
2.
Product Method.
1.
Simple Interest Method: This method
is applicable when a fixed amount is withdrawn regularly at a fixed interval of
time.
(a)
When the drawings were
made in the beginning of every month then interest will be charged for 6 ½
months.
(b)
When the drawings were
made in the middle of every month then interest will be charged for 6
months.
(c)
When the drawings were
made at the end of every month then interest will be charged for 5 ½
months.
(d)
When the drawings were
made in the beginning of every quarter then interest will be charged for 7 ½
months.
(e)
When the drawings were
made at the end of every quarter then interest will be charged for 4 ½
months.
Formula calculating interest:
Interest on drawings = Principal × Rate × Time
100
2.
Product Method: This method is
applicable when different amount is withdrawn at different intervals of time.
Under this method, the products of the amount withdrawn and relevant period are
totaled and interest for one month on the total product is computed. The
procedure for calculation of interest by product method is explained in
following example:
Illustration 1. In a partnership, partners are charged interest on drawings at 15%
p.a. During the year ended 31st
December 2005 a partner drew as follows:
February 1 Rs.1,000
May 1 Rs.2,500
June 30 Rs.1,000
October 31 Rs.3,000
December 31 Rs.1,000
What is the interest chargeable to
the partner?
Solution:
Product Method
When drawings are made in uneven amount at different
dates, interest on drawings can be calculated by ‘Product Method’ as follows:
Date
|
Amount (Rs.)
|
Period in months
|
Product (Rs.)
|
February 1
May 1
June 30
October 31
December 31
|
1,000
2,500
1,000
3,000
1,000
|
11
8
6
2
0
|
11,000
20,000
6,000
6,000
0
|
Total
|
43,000
|
Interest on drawings = 43,000 × 15 × 1 = Rs. 537.50
100 × 12
Interest can also be computed using Product Method on
daily balances. Product is determined by multiplying amount with the number of
days interest is computed product total for one day.
Note: When the date of
withdrawal of the amount of drawings is not clearly mentioned
in
the question then interest will be charge for 6 months on whole amount.
No comments:
Post a Comment