Journal entry for interest on drawing

How to make Journal entry for interest on drawing

How to make Journal entry for interest on drawing

interest on drawings journal entry

What is Drawing?

When ower of the business withdrawal money from business for his personal use it is known as Drawings.

But it the business keeps on withdrawing money from the business for personal use it affects it business, therefore, to refrain him from withdrawing money from business a interest is levy on him which is known as Interest on drawing.

Example of Drawing

Suppose Mr A start business with cash Rs 100000 and after a month he withdrew cash from his business Rs 10,000 for his personal use hence the money withdrawal by Mr A is drawing by nature and interest on drawing is 10% .

When a business man withdrawal money from business in form of drawing it means he reduces his capital from business hence automatically in financial year whatever drawing he taken away from business will be deducted from his Capital.As he withdrawal money from business it will effects his business therefore a Interest on capital is imposed on him therefore in ythis case it will be Rs 1000 which is 10% of Rs. !0,000.

 

Journal Entry of Interest on Drawing

Interest on drawing is Income for business because it is imposed on businessman and to be added to profit side of profit and loss account in book.

Journal entry will be .

Drawing A/c Dr.     XXXX

To Interest on Drawing A/c XXXXa

Interest on Drawing in Profit and Loss A/c

Interest on drawing is income for business and income is shown in the credit side of profit and loss account .

let see in the table below

Particular

Amount

Particular

Amount

 

 

By Interest
on Drawing

xxxxx

 Why Interest on Drawing is income for the business?

Interest on drawing is interest  levied on businessman for reducing capital of business in form of drawing. When a business man withdrew money from business for personal expenses then that effect Capital of business as Capital get decreases therefore a interest in charge from businessman. It does not mean business man pay interest in form of cash or bank. But it will effect its profit side of profit and loss accounts. It an accounting entry of adjustment of profit and decreasing of capital.

Interest on Drawing in Balance Sheet

Interest on drawing in Balance sheet .

Balance has two side Liabilities and Assets .

Note Drawing is neither Asset neither liabilties it just means reducing the capital of business. To reduce the capital of business drawing is deducted from business similary interest  on Drawing is dedected form capital of business because it is because of business man.

Liabilities

Amount

Assets

Amount

Capital A/c

+ profit /- loss

–          Interest on drawing

–          Drawing

   

Goods as Drawing

Example :

Proprietor taken away goods Rs 10,000 for his personal use.

Its means the owner was taken away goods from the business for his personal use.

therefore Journal entry for the above will be 

Drawing A/c Dr.

10,0000

   To Purchases A/c

   10,000

(Being goods taken away by owner for

his personal use)

Here purchase is credited because when goods are purchased the value of that goods is taken .

Now is Trading Account value of purchase is deducted by Rs 10,000

Particular

Amount

Particular

Amount

To Purchase A/c

–          Drawing 10,000

   

In balance sheet drawing will be deducted from Capita a/c

Liabilities

Amount

Particular

Amount

Capital  A/c

–          Drawing 10,000

   

Asset as Drawing

Example :

Proprietor took away Furniture Rs 10,000 for his personal use.

Its means the owner was taken away Asset from the business for his personal use.

therefore Journal entry for the above will be 

Drawing A/c Dr.

10,0000

   To Furniture A/c

   10,000

(Being Furniture taken away by owner for

his personal use)

Here a purchase is credited because when goods have purchased the value of that goods is taken.

Now is Trading Account value of the purchase is deducted by Rs 10,000

Particular

Amount

Particular

Amount

To Purchase A/c

–          Drawing 10,000

   

In the balance sheet, drawing will be deducted from Capita a/c and from Asset 

Liabilities

Amount

Asset

Amount

Capital  A/c

–          Drawing 10,000

 

Furniture

-Drawing 10,000

 
Open chat