Monday, November 22, 2010

How to Calculate Interest on Drawings

Methods of calculating of Interest on Drawings

                Interest on drawings may be calculated from any of the two methods which are given as under:-
(1) Simple Method
Interest on drawing should be calculated from the date of the withdrawal of the amount.  In the absence of the date of withdrawal, interest should be charged for six months on the whole of the amount because it will be assumed that the drawings were made evenly throughout the year.  For example a partner withdraw Rs. 16000/- during a year and interest is to be charged @ 12% per annum, interest on drawing will be calculated as follows: -                                                                                          

                                                                           12       6 
                                                            =16000 x ----  x --  = Rs. 960.00
                                                                          100      12

(In brief   =  ((16000x0.12)/2 = 960)

Under this method, interest on drawing can be calculated separately on each amount of drawing, from the date of drawing till the close of accounting period.  Interest on each amount of drawing is calculated with the help of the following formula :-

Interest on Drawings = Amount of Drawings x (Rate of Interest/100) x (months/12)

(2) Product Method:- Under this method, first of all the products are computed by multiplying the each set of drawings from its duration.   Therefore, the different products are added and the interest is calculated on the total of products so arrived at for one month.  The advantage of this system is that separate calculations are not required each time.  Following formula is given for the calculation of interest under this method:-

Interest on Drawings = Total of products x (Rate of Interest /100) x ( 1/12)

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