Accounting for Partnership: Basic Concepts
Interest on drawings
Calculate interest on drawings by average period and product method.
Interest on drawings is charged on money partners withdraw for personal use, but only if the deed provides for it. It is calculated like simple interest: drawings × rate/100 × time ÷ 12, where the time is how long the money was out of the business, up to the year end.
There are four situations:
- Dates not given: assume the drawings were spread evenly through the year, and charge interest for 6 months (half the yearly rate).
- Different amounts on given dates: simple method: apply the formula to each withdrawal and add up. Example at 15%, year ending 31 December: 2,000 drawn on 1 February (11 months) gives 275; 5,000 on 1 May (8 months) gives 500; 2,000 on 30 June (6 months) gives 150; total 925.
- The same, by the product method: multiply each amount by its months (2,000 × 11 = 22,000; 5,000 × 8 = 40,000; 2,000 × 6 = 12,000), add the products (74,000), and charge interest for one month: 74,000 × 15% × 1/12 = 925. Don't multiply by months again: they are already in the products.
- Equal amounts at equal intervals: use the average period: (months left after the first withdrawal + months left after the last) ÷ 2. Then interest = total drawings × rate × average period ÷ 12.
Ready figures for the average period:
| Drawn each month | Average period |
|---|---|
| at the beginning | 6½ months |
| in the middle | 6 months |
| at the end | 5½ months |
| Drawn each quarter | |
| at the beginning | 7½ months |
| in the middle | 6 months |
| at the end | 4½ months |
When was the money drawn, and for how long was it out?
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