Adjustment of Interest on Drawings in Final Accounts (Financial Statements)

Drawings is the amount withdrawn by partners for their personal use from the business. Therefore, the firm charges a certain rate of interest for the amount withdrawn by partners. The interest on Drawings is considered an income for the firm and an expense for the partners.

Adjustment:

A. If Interest on Drawings is given outside the trial balance:

In such case, two effects will take place –

• Interest on Drawings will be shown in the Cr.. side of the Profit & Loss A/c, being an income for the business.
• It will be added to the Drawings A/c  and subtracted from the Capital A/c in the Liabilities side of the Balance Sheet.

B. If Interest on Drawings is given Inside the trial balance:

In such a situation, Interest on Drawings will only be shown in the Cr. side of the Profit & Loss A/c, being an income for the business.

Illustration:

The following adjustments were noted:

• Interest on Drawings is to be charged at 10% p.a. These Drawings have been made at the beginning of the year.
• Interest on capital @ 5% to be provided.
• Salary to be provided to proprietor i.e. 5000.
• Interest on loan to be provided at 6% p.a.
• Interest on Bank Deposits is to be provided @ 4%.

Solution: