Interest on Drawings :
Amount withdrawn by the owner for his personal use is called as drawings. When interest on capital is allowed, then interest on drawings is charged from the owner. Interest on drawings is an income for the business and will reduce the capital of the owner.
Example: The trial balance shows the following:
Rs.
Capital as on 31.3.2004 4,00,000
Drawings as on 31.3.2004 30,000
Adjustment : Charge interest on drawings @ 5%.
Adjusting Entry
|
Date |
Particulars | LF | Debit Rs. |
Credit |
|
2004 Mar 31 |
Capital A/c Dr
To Interest on Drawings A/c (Interest on drawings) |
1,500 |
1,500 |
To bring interest on drawings to Profit and Loss account the following transfer entry is required.
Transfer Entry
|
Date |
Particulars | LF | Debit Rs. |
Credit |
| 2004
Mar 31 |
Interest on drawings A/c Dr
To Profit & Loss A/c (Interest on drawings) |
1,500 |
1,500 |
Interest on drawings will be shown
(i) on the credit side of Profit and Loss account and
(ii) on the liabilities side of the Balance Sheet by way of addition to the drawings which are ultimately deducted from the capital.
Profit & Loss Account
for the year ending 31s’ March, 2004
Dr. Cr.
|
Particulars |
Rs. | Particulars |
Rs. |
|
By Interest on drawings |
1,500 |
Balance Sheet as on 31st March, 2004
|
Liabilities |
Rs. | Rs. | Assets | Rs. |
Rs. |
| Capital |
4,00,000 |
||||
| Less: Drawings 30,000
|
|||||
| Interest on drawings 1,500 |
31,500 |
||||
|
3,68,500 |