Study Material & Notes for the Chapter 1
Partnership - Fundamentals
II. INTEREST ON CAPITAL AND DRAWINGS
A. Interest on Capital
- Interest is computed on time proportion basis, number of days capital deployed in Firm
- Interest is computed only on Opening Capital, Additional Capital & drawings against capital
- Interest is not computed on Profit/Loss
- Interest on Capital= Amount of capital X Rate of Interest X Time
- If only Closing Capital is given, interest cannot be computed on Closing capital
- We need to find out Opening Capital and capital additions/deletions
- If Opening Capital is not given prepare Capital A/C or use formula
- Opening Capital=Closing Capital + Loss + Drawings- Profit – Additional Capital
- Prepare Ledger Account as per the below format
Partner Capital Account
For the year ended …………………….
Journal Entry
B. Interest on Drawings
- Product Method (unequal amount withdrawn at different dates)
- Simple Method – Interest is computed for each drawing separately using simple interest formula:
- Product Method – Interest is computed for each drawing separately using simple interest formula:
Product = Each Drawing x No. of Months till Financial year end
- Average Period Method (Uniform drawings & uniform time internal)
- Two prerequisites / condition of using this method
- Uniform/Similar time intervals…monthly, quarterly, half-yearly etc.
- Uniform/Similar amounts on each interval say 1000, 5000, 10000 etc.
Important to Note:
- If date of withdrawal is not given, the interest on total drawings for the year is calculated for six months on the average basis
- When rate of interest is given without the word ‘per annum’ interest is charged without considering the time factor.
Journal Entry
