Question

Explain any one method of calculation of interest on drawings.

Hint:

Remember to use the correct time period for the number of months the drawings are made, as it significantly impacts the interest calculation.

Answer 1

Interest on drawings is calculated in partnership firms to ensure that the partners do not take excessive amounts from the business. One common method for calculating interest on drawings is the Time Method.

Time Method:
In this method, interest is calculated based on the time for which each partner's drawings have been withdrawn. The formula is: \[ \text{Interest} = \frac{\text{Amount of Drawings} \times \text{Rate of Interest} \times \text{Time}}{12} \] where: -
Amount of Drawings: The amount withdrawn by the partner. -
Rate of Interest: The annual rate at which interest is charged. -
Time: The time period in months for which the amount was withdrawn.
Example:
If a partner withdraws \$1,000 for 3 months, and the interest rate is 6% per annum, the interest on the drawings will be calculated as: \[ \text{Interest} = \frac{1000 \times 6 \times 3}{12} = 150 \]

Conclusion:
The Time Method is a simple and effective way to calculate interest on drawings, ensuring that partners are fairly charged for the funds they take from the business.