Accounting and Journal Entry for Interest on Drawings
Cash or Goods withdrawn by a proprietor from the business for their personal use is labelled as drawings. Interest may be charged by the business at a fixed rate when a business owner draws funds or assets. Journal entry for interest on drawings includes two accounts; Drawings A/C & Interest on Drawings A/C.
Interest on drawings is an income for the business, hence, it is added to the interest account of the firm thereby increasing the total income of the business.
In common scenarios where interest on capital is charged by the owner, interest on drawings is also charged by the business.
Journal entry for interest on drawings is;
|Drawings A/C||Debit||Debit the increase in drawings|
|To Interest on Drawings A/C||Credit||Credit the increase in income|
Charge 10% interest on drawings at the end of the year to Maya, her total drawings from the business are valued at 1,00,000.
|Maya’s Drawings A/C||10,000|
|To Interest on Drawings A/C||10,000|
(Interest charged to Maya on drawings at 10% of 1,00,000 at the end of the year)
Maya’s withdrawals from the business at the end of the year are at 1,00,000 and she is charged interest on drawings at the rate of 10%, consequently, this increases the firm’s income by 10,000.