explain in brief the main methods to calculate interest on drawings
Answers
Answer:
Interest on drawings in charged by the firm only when it is clearly mentioned in Partnership Deed. It is calculated with reference to the time period for which the money was withdrawn.
Case 1: When Rate of Interest on Drawings is given in %. Interest on Drawings is calculated with a flat rate irrespective of date of drawings.
Case 2: When Rate of Interest on Drawings is given in % p. a.
When date of Drawings is not given. Interest on Drawing = Total Drawings x Rate/100 x 6/12. Note : Interest is calculated for a period of 6 months
When date of Drawings is given. Interest on Drawing = Total Drawings x Rate/100 x Time Left after drawings/12
Case 3: When different amount are withdrawn on different date : We have the following two methods to calculate the amount of Interest on Drawing :
Simple Interest Method: In this method, interest on drawing is calculated for each amount of drawing indivdually of the basis of periods for which
Product Method: In this method, the amounts of drawings are multiplied by the period for which it remained withdrawn during the period, Interest for 1 month is calculated on the sum of these products. We can explain the above mentioned two methods with the help of an example.
Example: Aarushi and Simran are partners in a firm. During the year ended on 31st March 2011 Aarushi makes the drawings as under : Date of Drawing Amount (`) 01082010, 5,000, 31122010, 10,000, 31032011, 15,000. Partnership Deed provided that partners are to be charged interest on drawings @ 12% p.a. Calculate the interest chargeable to Aarushi Drawing by using Simple Interest Method and Product Method.
Solution: 1. Simple Interest Method: Date of Amount of Months till Interest @ 12% p.a. Withdrawal Drawings (`) March 31, 2011 (`) 01.08.2010 5,000 08 400, 31.12.2010 10,000 03 300, 31.03.2011 15,000 00 000, 700. 2. Product Method: Date of Amount of Months for which Product. Withdrawal Drawings (`) amount has (`) withdrawn till December 31, 2011. 01.08.2010 5,000 08 40,000, 31.12.2010 10,000 03 30,000, 31.03.2011 15,000 00 00000, 70,000. Interest on Drawing = Total Product x Rate/100xTime/12 (in months) = 70,000x12/100x1/12 = 700.
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Explanation:
Interest on drawings in charged by the firm only when it is clearly mentioned in Partnership Deed. It is calculated with reference to the time period for which the money was withdrawn.
Case 1: When Rate of Interest on Drawings is given in %. Interest on Drawings is calculated with a flat rate irrespective of date of drawings.
Case 2: When Rate of Interest on Drawings is given in % p. a.
When date of Drawings is not given. Interest on Drawing = Total Drawings x Rate/100 x 6/12. Note : Interest is calculated for a period of 6 months
When date of Drawings is given. Interest on Drawing = Total Drawings x Rate/100 x Time Left after drawings/12
Case 3: When different amount are withdrawn on different date : We have the following two methods to calculate the amount of Interest on Drawing :
Simple Interest Method: In this method, interest on drawing is calculated for each amount of drawing indivdually of the basis of periods for which
Product Method: In this method, the amounts of drawings are multiplied by the period for which it remained withdrawn during the period, Interest for 1 month is calculated on the sum of these products.