How to calculate average period in mnths for charging interest on drawings?
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1. When dates of drawings are not given:
(i) Average period method: If the dates of drawings are not given, the interest on drawings is calculated on the average basis on the total amount of drawings made during the accounting period for half of the accounting period. It is based on the assumption that the amounts were drawn evenly through out the accounting year.
Formula: Interest on drawings = Total drawings × Rate/100 × 6/12
(ii) Average rate of interest method or when drawings are made irrespective of the time period: Sometimes the average rate of interest is given in the question, in such a case; it is assumed that the rate of interest is already half on the basis of 6 months. Thus, time will not be considered.
Formula: Interest on drawings = Total drawings × Average Rate/100
2. When dates of drawings are given:
(i) Product Method: When different amounts are withdrawn at different intervals, the interest will be calculated with the help of product method. In this each amount of drawings is multiplied with number of days/months (from the date of drawings to the date of final accounts) to find out the product and then products are totaled. Interest is calculated on total product at the rate of interest for one month or one day.
Formula: Interest on drawings = Total of Product × Rate/100 × 1/365 or 1/12
(ii) Monthly/quarterly drawings method: If uniform amount is withdrawn at each time and the interval between two withdrawals also is uniform. In such a case interest on drawings is calculated with monthly drawings method. Time period in this method is calculated as follows:
In that case there will be following cases:
When drawings are for 12 months period
o At the beginning of each month = Total drawings × Rate/100 × 6.5/12o At the end of every month = Total drawings × Rate/100 × 5.5/12o At the middle of every month = Total drawings × Rate/100 × 6/12
When drawings are for 6 months period
o At the beginning of each month = Total drawings × Rate/100 × 3.5/12o At the end of every month = Total drawings × Rate/100 × 2.5/12o At the middle of every month = Total drawings × Rate/100 × 3/12
When drawings are made quarterly during the period
o At the beginning of each quarter = Total drawings × Rate/100 × 7.5/12o At the end of every quarter = Total drawings × Rate/100 × 4.5/12
Interest on Partner's Capital:
Interest on capital is to be allowed to the partners if the same is provided in the partnership deed and is allowed at the given rate with reference to time period for which the capital has been used in the business.
Formula: Interest on capital = Amount of Capital × Rate/100 × Time
(i) Average period method: If the dates of drawings are not given, the interest on drawings is calculated on the average basis on the total amount of drawings made during the accounting period for half of the accounting period. It is based on the assumption that the amounts were drawn evenly through out the accounting year.
Formula: Interest on drawings = Total drawings × Rate/100 × 6/12
(ii) Average rate of interest method or when drawings are made irrespective of the time period: Sometimes the average rate of interest is given in the question, in such a case; it is assumed that the rate of interest is already half on the basis of 6 months. Thus, time will not be considered.
Formula: Interest on drawings = Total drawings × Average Rate/100
2. When dates of drawings are given:
(i) Product Method: When different amounts are withdrawn at different intervals, the interest will be calculated with the help of product method. In this each amount of drawings is multiplied with number of days/months (from the date of drawings to the date of final accounts) to find out the product and then products are totaled. Interest is calculated on total product at the rate of interest for one month or one day.
Formula: Interest on drawings = Total of Product × Rate/100 × 1/365 or 1/12
(ii) Monthly/quarterly drawings method: If uniform amount is withdrawn at each time and the interval between two withdrawals also is uniform. In such a case interest on drawings is calculated with monthly drawings method. Time period in this method is calculated as follows:
In that case there will be following cases:
When drawings are for 12 months period
o At the beginning of each month = Total drawings × Rate/100 × 6.5/12o At the end of every month = Total drawings × Rate/100 × 5.5/12o At the middle of every month = Total drawings × Rate/100 × 6/12
When drawings are for 6 months period
o At the beginning of each month = Total drawings × Rate/100 × 3.5/12o At the end of every month = Total drawings × Rate/100 × 2.5/12o At the middle of every month = Total drawings × Rate/100 × 3/12
When drawings are made quarterly during the period
o At the beginning of each quarter = Total drawings × Rate/100 × 7.5/12o At the end of every quarter = Total drawings × Rate/100 × 4.5/12
Interest on Partner's Capital:
Interest on capital is to be allowed to the partners if the same is provided in the partnership deed and is allowed at the given rate with reference to time period for which the capital has been used in the business.
Formula: Interest on capital = Amount of Capital × Rate/100 × Time
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