Drawings is the term used in the context of partnership, it refers to that amount or goods which the partners has withdrawn from the business. Interest on drawing is levied on outstanding amount and it will be charged until the individual repay back to the company and therefore from the point of view of the business it is considered as income, the reason being that according to business entity concept, the company and owners of the firm are considered to be different person and not same and therefore any personal transaction of the owner is to be treated as transaction from outside party in the books of accounts. Given below is the journal entry for interest on drawings –
Drawing Account Dr
To Interest on drawing account
As one can see that business will get income in the form of interest that is the reason why it is credited.
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I have two doubts, actually; regarding interest on [1] capital and [2] interest on drawings.
Why do we Credit “Capital” a/c in [1]? Isn’t capital decreasing?
And
Why do we Debit “Drawings” a/c in [2]?
As interst on capital is an expenses of a firm that has be paid to shareholders, so it is debited.
drawing is the amount withdrawn by shareholder for personal use, so it bears interest which is treated as income of a firm , so it is credited .
Why Drawing a/c is debited.. is it receiver.
if the proprietor withdraws money for domestic use and liable to pay interest on drawings .
my view point is ,
(1) when withdraws :-
drawings account/capital accont…..Dr.
to cash a/c
(reverse entry of introduce of cash)
(2) incurs interest on drawings:-
drawings account/capital a/c ….Dr
to interest on drawings a/c
(3) amount received from pro. against drawings:
cash a/c…..Dr
to drawings/ capital a/c
(to cancel the previous entry )
isn’t it ????
In above question why we don’t debit the cash a/c in interest on drawing question .
And why not credit cash a/c on interest on capital question
Do we calculate Interest on Drawings on goods withdrawn in Single Entry System?
Why is interest on drawings debited in the current account
When interest on drawings is charged why our capital is reduced as we make the following entry
Capital A/c Dr.
To interest on drawings
As we know that by debiting the capital A/c it means our capital is reduced…so my question is how our capital is reduced despite interest on drawings is income for a firm..?
Capital is reduced because in accounting according to business entity concept business and owner are different from each other and that is why interest on drawings is income of business and not the owner and since owner has made drawings it will lead to reduction in capital of the owner.