Drawings means the amount withdrawn by partners for their personal use. It may be in the form of cash or kind. These are shown always on the Debit side of the Partner’s Capital Account.
It may be out of capital or against profit. Drawing out of capital means withdrawal of part of capital while drawing against profit mean withdrawal of amount against profit earned during the year by the firm.
DRAWING AGAINST CAPITAL
It means the withdrawal by a partner out of his or her capital. Interest on capital is not allowed or paid by the firm on the amount of capital withdrawn. The amount withdrawn by a partner against his or her capital is debited to his or her capital account. As a result of this, partner gets interest on capital on the amount and for the period capital remains in the business.
DRAWING AGAINST PROFIT
It mean amount withdrawn by a partner against his or her share of profit earned by the firm for the year. When a partner withdraws amount against his or her share of profit, the firm charges interest on such amount at an agreed rate of interest in the Partnership Deed. If the partnership deed does not exist or it exist but does not have a clause for charging interest on drawings, interest is not charged on drawing. Interest is calculated for the period on the amount withdrawn by a partner, i.e., from the date of drawing till the end of the accounting period.
DIFFERENCE BETWEEN DRAWINGS AGAINST PROFIT AND DRAWINGS AGAINST CAPITAL
|BASIS OF DIFFERENCE||DRAWINGS AGAINST PROFIT||DRAWINGS AGAINST CAPITAL|
|WHERE DEBITED||It is debited to Drawings Account.||It is debited to Capital Account.|
|PART||It is a part of expected profits.||It is a part of capital.|
|EFFECT||It does not reduce capital.||It reduces capital.|
|INTEREST ON DRAWINGS||It is considered for calculating interest on drawings.||It is not considered for calculating interest on drawings.|
|INTEREST ON CAPITAL||It is not considered for calculating interest on capital.||It is considered for calculating interest on capital.|
Where withdrawals of money are made at frequent intervals, it is usual practice to open “Drawing Account’ for each partner. This facilitates in keeping the capital and current account uncongested. This, at the end of the year is transferred to Capital or Current Account.
INTEREST ON DRAWINGS
It is charged by the partners at a fixed rate written on the partnership deed. In the absence of this clause in the partnership deed no interest is charged.
Interest on drawings is the income of the firm and is an expense for partner. Usually, it is not received by the firm in cash. It is calculated on the amount of cash and goods withdrawn by the partners for personal use. Partners are entitled to make drawings from the business against their claim of salaries, commission and interest on capital etc. In addition to this, they can withdraw money from business in anticipation of their share of profits to be earned by the business during the accounting period.
If the amount withdrawn by the partners are not in their mutual profit share ratio and partner may overdraw or gain at the cost of others. Therefore, to avoid this, interest on drawing is charged so that one who draws more would not gain and is brought at par with the partners whose amount withdrawn is less. Secondly, the interest keeps a check on unnecessary amount withdrawn and this helps in out flow of funds.
| FOR DRAWINGS: |
Partner’s Drawings A/c Dr.
To Cash/ Purchases A/c
| FOR INTEREST ON DRAWINGS |
Partner’s Drawings/ Current A/c Dr.
To Interest on Drawings
| FOR TRANSFER OF INTERST ON DRAWINGS TO PROFIT & LOSS APPROPRIATION ACCOUNT |
Interest on Drawings A/c Dr.
To Profit & Loss Appropriation A/c
METHODS OF CALCULATING INTEREST ON DRAWINGS
Drawings of a partner may be broadly divided into:
Irregular Drawing: It means drawing of same amount or different amounts at irregular intervals.
Regular Drawing: It means drawing of same amount at regular intervals.
When drawing are made at irregular period or of different amounts, Product Method of calculating interest is followed. And when drawing are made of same amount at regular intervals, interest is calculated using Average Period Method.
There are two methods which are as follows:
When unequal amount is withdrawn at different dates or when there is irregular drawing, interest is calculated with the help of Product Method.
Product Method: Under this method, the amount of drawing is multiplied with the number of months and number of days it has been used. The product so obtained is totaled and the interest is calculated thereon for one month, if the period is taken in months and for one day if the period is taken in the days.
INTEREST : TOTAL OF PRODUCT * (RATE OF INTEREST/100) * (1/12)
In a partnership, partners are charged interest on drawing @15%p.a. During the year ended 31-3-2018, a partner drew as follows:
The interest will be:
|Date||Amount (₹)||No. of months up to 31-3-18||Product|
Interest in Drawings =86,000*15*1/100*12
AVERAGE PERIOD METHOD
This method is used when there is regular drawings or when:
- The amount of drawings is uniform
- The time interval between the two drawings is also uniform
INTEREST ON DRAWING= TOTAL DRAWINGS* RATE OF INTEREST*AVERAGE PERIOD/100*12
The different cases under this method are as follows:
|1.||When Fixed Amount is withdrawn on FIRST DAY of every Month||6.5 Months|
|2.||When Fixed Amount is withdrawn on LAST DAY of every Month||5.5 Months|
|3.||When Fixed Amount is withdrawn on FIRST DAY of every Quarter||7.5 Months|
|4.||When Fixed Amount is withdrawn on LAST DAY of every Quarter||4.5 Months|
|5.||When no date of drawings is given||6 Months|
|6.||When a Fixed Amount is withdrawn in the MIDDLE of every month||6 Months|