Interest on Drawings
Drawings is the amount withdrawn by partners for their personal use from the business. Therefore, the firm charges a certain rate of interest for the amount withdrawn by partners. The interest on Drawings is considered an income for the firm and an expense for the partners.
Adjustment:
A. If Interest on Drawings is given outside the trial balance:
In such case, two effects will take place –
- Interest on Drawings will be shown in the Cr.. side of the Profit & Loss A/c, being an income for the business.
- It will be added to the Drawings A/c and subtracted from the Capital A/c in the Liabilities side of the Balance Sheet.
B. If Interest on Drawings is given Inside the trial balance:
In such a situation, Interest on Drawings will only be shown in the Cr. side of the Profit & Loss A/c, being an income for the business.
Financial Statement with Adjustment with Examples-II
Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year, but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Five adjustments such as Interest on Capital, Interest on Drawings, Interest on Deposits, Interest on Loans, and Proprietor’s Salary are discussed below: