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INTEREST ON DRAWINGS

The owners of business may sometimes draw cash or goods for their private or personal or domestic use. Drawings, in this way, is the amount advanced by the firm to its proprietors. If the firm pays interest on capital, the funds invested by the proprietor, it is fully justified that it should also charge interest on the amount withdrawn by the proprietors from business. Interest on drawing will be received by the business, so it is an income. It should, therefore, be credited. The capital ·will reduce with the interest on drawing, so capital account should be debited. In case of drawing and interest on drawing it will be preferable to debit. Drawings account instead of capital account.

Interest on drawings will be posted at the credit side of profit and loss account, because it is an income of the business. It will also be deducted from the capital at the liabilities side of the Balance sheet. This treatment will be made if it is an item in the adjustment.

If the item of interest on drawings is given in the Trial balance, it will mean that the balance of capital account has already been adjusted. Now, interest on drawings account will be shown as income at the credit side of profit and loss account only.