Interest on Drawings

The partnership agreement may also provide for charging of interest on money withdrawn out of the firm by the partners for their personal use.

No interest is charged on the drawings if there is no express agreement among the partners about it.

However, if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period for which drawings have been made.

Cases –

  • When Fixed Amounts was Withdrawn Every Month
  • When Fixed Amount is withdrawn Quarterly
  • When Varying Amounts are Withdrawn at Different Intervals

 


When Fixed Amounts was Withdrawn Every Month

  1. If withdrawn on the first day of every month, interest on total amount will be calculated for months;

Average Period  =   (No of months used for first drawing + No of months for last drawings)         

                                                      ——————————————————————————————-                                                 

                                                                                              2

                                =     (12+1) / 2 = 6-1/2 – > 6.5 Months

                               

  1. If withdrawn at the end at every month, it will be calculated for months,

Average Period = (No of months used for first drawing + No of months for last drawings)    

                                               ————————————————————————————————                                                                                          

                                                                                   2

                                  = (11+0) / 2 = 5-1/2 – > 5.5 Months

  1. If withdrawn during the middle of the month, it will be calculated for 6

  Average Period = (No of months used for first drawing + No of months for last drawings)    

                                                 ——————————————————————————————–                                                    

                                                                                          2

                                                                    =  (11.5+.50) / 2 = 6 – > 6 Months

 


When Fixed Amount is withdrawn Quarterly

  • If money is withdrawn at the beginning of each Quarter

               Average period =  (12 + 3) / 2      =      7-1/2  (7.5 months)

  • If money is withdrawn at the end of each Quarter

              Average period =   (12 – 3)/2         =      4-1/2  (4.5 months)

 


When Varying Amount is withdrawn at different interval

When the partners withdraw different amounts of money at different time intervals, the interest is calculated using the product method.

Step 1Compute Periods for which withdrawals separately.

                            (In months / In weeks / In Days)

Step 2Compute Product for each withdrawal

                           Product = Amount Withdrawal x Period as in Step 1

Step 3 Compute Interest

                        Sum or products x Rate x 1/12      

        • Replace 1/12 with 1/52 (If Step 1 is in weeks)
        • Replace 1/12 with 1/365 (If Step 1 is in days)

When date of drawings are not given

        • Compute for 6 months

                            Interest = Amount x Rate X 6/12