Question 4: Illustrate how interest on drawings will be calculated under various situations.
Answer:
The partnership agreement may also provide for charging of interest on money withdrawn out of the firm by the partners for their personal use. As stated earlier, no interest is charged on the drawings if there is no express agreement among the partners about it. However if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period money remained outstanding from the partners during an accounting year. Charging interest on drawings discourages excessive amounts of drawings by the partners. The calculation of interest in drawings under different situations are. When Fixed Amounts is Withdrawn Every Month : Many a times a fixed amount of money is withdrawn by the partners, at equal time interval, Aashish withdrew Rs. 10,000 per month from the firm for his personal use during the year ending March 31, 2006. The calculation of average period and the interest on drawings, in different situations would be as follows:
(a) When the amount is withdrawn at beginning end of each month
(b) When the amount is withdrawn at the end of each month
(c) When money is withdrawn in the middle of the month When money is withdrawn in the middle of the month, nothing is added or deduced from the total period. When Fixed Amount is withdrawn Quarterly. If the amount is withdrawn at the beginning of each quarter, the interest is calculated on the total money withdrawn during the year, for a period of seven and half months and if withdrawn at the end of each quarter it will be calculated for a period of 12 months.
Alternatively, the interest can be calculated on the total amount withdrawn during the accounting year, for a period of 12 months. When Varying Amounts are Withdrawn at Different Intervals. When the partners withdraw different amounts of money at different time intervals, the interest is calculated using the product method. When Dates of Withdrawal are not specified. When the total amount withdrawn is given but the dates of withdrawals are not specified, it is assumed that the amount was withdrawn evenly throughout the year.
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