The document provides an overview of interest on drawings in partnership accounts, distinguishing between drawings against capital and drawings against profit. It discusses the methods of calculating interest on drawings (iod), including the simple method, product method, and average period method, with examples. Additionally, it covers relevant journal entries and the effects of drawings on capital and profits.

1. ACCOUNTS
XII – CBSE
INTEREST ON DRAWINGS
FUNDAMENTALS OF PARTNERSHIP
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2. PRESENTATION BY:-
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CS. SOHIL GAJJAR
CS, MA [ECONOMICS], B.COM
CO-FOUNDER &
CHIEF MENTOR OF
ACUMEN EDUCATION

3. TOPICS TO BE COVERED
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1. INTRODUCTION
2. MEANING
3. DIFFERENCE BETWEEN DRAWINGS
AGAINST CAPITAL AND DRAWINGS
AGAINST PROFIT
3. JOURNAL ENTRY
4. METHODS OF IOD

4. INTRODUCTION
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Drawings by a Partner may be broadly divided into:-
1. Irregular Drawings:- It means drawings of the
same amount or different amount at irregular
intervals
2. Regular Drawings:- It means drawings of same
amount at regular intervals.

5. MEANING
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Drawings mean the amount withdrawn in cash or
in kind, by the Partners for their personal use.
Drawings may be out of capital or against profit.

6. DISTINGUISH BETWEEN
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Basis Drawings against
Capital
Drawings against
Profit
Where
Debited
Capital Account Drawings account
Part It is against capital It is against expected profit
Effect It reduces the capital It does not reduce capital
IOD It is not considered for
calculating IOD
It is considered for
calculating IOD
IOC It is considered for
calculating IOC
It is not considered for
calculating IOC.
IOD – Interest on Drawings
IOC – Interest on Capital

7. JOURNAL ENTRY
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1. Partner’s Capital/Current A/c…………….. Dr.
To Interest on Drawings A/c
[Being Interest Charged on Drawings]
2. Interest on Drawings A/c…………………… Dr.
To Profit and Loss Appropriation A/c
[Being IOD transferred]
Net Effect [Combined Entry]
Partner’s Capital/Current A/c…………….. Dr.
To Profit and Loss Appropriation A/c

8. METHODS OF CALCULATING IOD
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METHODS
OF IOD
PRODUCT
METHOD
SIMPLE
METHOD
PRODUCT
METHOD
AVERAGE
PERIOD
METHOD

9. SIMPLE PRODUCT METHOD
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When unequal amount is withdrawn at different dates or when there
is irregular drawings, interest on drawings is calculated with the
help of Simple Method.
FORMULA:-
IOD = Amount withdrawn x Rate of Interest x Time Factor
100
Example:
Mr. Gabbar a partner of Sholay Firm is charged interest on
drawings @ 15% p.a. During the year ended 31st March, 2020,
he has withdrawn the following amount
Date 1st May, 19 1st Aug, 19 30th Sep, 19 31st Jan 2020 31st Mar, 20
Rs. 4,000 10,000 4,000 12,000 4,000

10. SOLUTION
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DATE AMOUNT
Rs.
NO. OF MONTHS UPTO
31ST MARCH, 2020
INTEREST @
15%
1st May 4,000 11 550***
1st Aug 10,000 8 1000
30th Sep 4,000 6 300
31st Jan 12,000 2 300
31st March 4,000 0 0
Total 34,000 2,150
***Interest = 4,000 x 15 x 11 = 550
100 x 12
= 10,000 x 15 x 8 = 1,000
100 x 12
In the same manner you can calculate other answers

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Under this method, the amount of drawings is
multiplied with the number of months or number
of days [as the case is] it is drawn. The product so
obtained is totalled and interest is calculated
theron.
FORMULA:-
IOD = Total Product x Rate of Interest x 1 OR 1
100 12 365
PRODUCT METHOD

12. Example: Same question as earlier
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IOD = 1,72,000 x 15 x 1 = 2,150
100 x 12
DATE AMOUNT
Rs. [A]
NO. OF MONTHS UPTO
31ST MARCH, 2020 [B]
PRODUCT
A X B
1st May 4,000 11 44,000
1st Aug 10,000 8 80,000
30th Sep 4,000 6 24,000
31st Jan 12,000 2 24,000
31st March 4,000 0 0
Total 34,000 1,72,000

13. AVERAGE PERIOD METHOD
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This method is used when there is regular drawings or when:
 The amount of drawings is uniform and
 The time interval between the two drawings is also uniform.
FORMULA:-
IOD= Total Drawings x Rate of Interest x Average Period
100 12
Avg. Period = Months left after 1st Drawings + Months left after Last drawings
2

14. IOD - AVERAGE PERIOD
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MONTHLY QUATERLY HALF-YEARLY
BEGINNING 6.5 7.5 3.5
MIDDLE 6 6 3
END 5.5 4.5 2.5
In Board Exam mostly practical question
based on average method is asked.

15. FOR ANY QUERIES
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