Which is the suitable method for calculation of Interest on drawings, when fixed amount is withdrawn every month?
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When different amounts are withdrawn on different dates,then PRODUCT METHOD of calculating interest on drawings is used.
Under this method, amount of each drawing is multiplied with its time duration. After that all the products are added together and interest is calculated on the total of products for a month.
Interest on Drawings = Total products*rate of interest*1/12.
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Direct method
Explanation:
Period of interest refers to the period from the date of drawings to the closing date of the accounting year. This method is suitable when different amounts are withdrawn at different time intervals.
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