Journal Entry for Interest on Capital Part 2

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Interest calculation can be calculated based on Simple Interest method or by product method.

Example: Shilpa and Sanju are partners with a capital of Rs. and Rs.1,60,000 on January 1,2006 respectively. Shilpa introduced additional capital of Rs.30,000 on July 1, 2006 and another Rs.20,000 on October 31,2006. Calculate interest on capital of Shilpa for the year ending 2006. The rate of interest is 9% p.a.

Solution:

Based on Simple Interest Method:

Based on Product Method:

 Amount (Rs.) Months Product 1,00,000 Total Product

Interest on Capital = 14,20,000 × 9/100 × 12/12 = Rs.10,650

Accounting Treatment of Interest on Drawings:

• Interest on Drawings (done by partners for personal use) is gain for partnership firm.

• Rate of interest is based on agreed rate mentioned in Partnership deed.

Journal Entry of Interest on Drawings:

Partners Capital/Current A/c Dr.

To Interest on Drawings A/c

(Charging interest on drawings to Partner’s Capital account)

Interest calculation can be calculated based on Simple Average method or by product method.

Simple Average Method:

When Fixed Amounts Are Withdrawn at Equal Time Intervals

Ex: For example, Manisha withdrew Rs. 1,000 per month from the firm for her personal use during the year ending December 31, 2016. Interest is charged at the rate of 12% per annum. Calculate Interest on Drawings -

When money is withdrawn at the beginning of the period.

 Date of drawings Amount withdrawn Period (in Month) 1 January 2006 1 February 2006 1 March 2006 1 April 2006 1 May 2006 1 June2006 1 July 2006 1 August 2006 1 September 2006 1 October 2006 1 November 2006 1 December2006

Average period =

When Money is Withdrawn at the Ending of the Period

Then date of drawing will be end date of the every month and amount will be same i.e. 1000 and period will start from 11 and decrease by 1 as months goes on. In the given example for the first month, Date of drawing will be 31st Jan, 2016 and Amount will be and the period will be 11 months.

Total months will be 66 and total amount will be by the end of the year.

When Money is Withdrawn in the Middle of the Month

The date of drawing will be middle date of the every month and the period starts from months. In the given example, Date of first drawing will be on 15th Jan, 2016 and the amount is and the period will be months.

Total months will be , total amount of drawings is by the end of the year.

Average period = Total of months/12

Interest on Drawings =

= Rs

When Money is Withdrawn Quarterly at the End of the Month

In the given example, Date of first drawing will be on 31st Mar, 2016 and the amount is 1000 and the period will be 9 months.

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