Interest on Drawing in case of Partnership (original) (raw)

Last Updated : 28 Apr, 2026

interest charged on amounts withdrawn by partners for personal use. It is calculated as an income for the firm and an expense for the partner, so it is credited to the Profit and Loss Appropriation Account and deducted from the partner’s Capital or Current Account. It is charged only if specified in the partnership deed, as per the Indian Partnership Act, 1932, and is calculated from the date of withdrawal to the date of the balance sheet. If the exact dates are not given, it is generally calculated for six months, assuming drawings are made evenly throughout the year.

Difference between Drawing against Profit and Drawing against Capital:

Basis	Drawing against Profit	Drawing against Capital
**Meaning	The amount withdrawn by the partners for personal use is a part of the profit earned by the firm in its ordinary course of business operation.	The amount withdrawn by the partners for personal use in excess of the profit amount. Such drawings are considered to be part of the capital.
**Effect on Capital	No effect on capital.	The capital of the partners is deducted/ reduced by the amount of drawing.
**Effect on Interest on Capital	Not considered to calculate Interest on Capital.	Considered to calculate Interest on Capital.
**Charging Interest on Drawings	Under such a situation Interest on drawings is charged on the amount of drawings.	Interest on drawings is not charged separately as the amount of drawing is deducted directly from the capital and reduces the amount of Interest on Capital.

Accounting Treatment:

The Capital accounts of the partners are maintained using either of the following methods:

Fixed Capital Account.
Fluctuating Capital Account.

The Accounting Treatment of Interest on drawings depends upon the method of maintaining the capital account used by the firm.

1. Fixed Capital Account:

The capital invested at the beginning remains constant unless additional capital is introduced. So, a separate account called a Current Account or Drawing Account is prepared to treat the Interest on drawings. Being an expense for the partner is debited to the Partner's Current Account.

Interest on drawings under Fixed Capital Accountmethod is treated as:

**Journal Entries:

**Posting in Various Accounts:

** denotes that Current A/c can either have credit or debit balance unlike Capital A/c that only have credit balance.

**Illustration:

Shiv and Ram are partners sharing profit in a ratio of 1:1. They follow a Fixed Capital Account method, and their fixed capital is ₹5,00,000 and ₹3,00,000, respectively. Their Drawings during the year are ₹50,000 and ₹20,000, respectively. Interest on Drawing is charged @10% p.a. as per the Deed. Balance of Current A/c of Shiv and Ram are ₹80,000 (Cr.) and 60,000 (Cr.), respectively. Pass the necessary Journal entries and show the treatment of Interest on Drawing in Profit and Loss Appropriation Account and Partner's Capital/ Current Account.

**Solution:

**2. Fluctuating Capital Account:

The capital of the partners changes throughout the year, and hence no separate account is needed. All the items are recorded in a single Capital Account. So, Interest on drawings being an expense for the partner is debited to the Partner's Capital Account.

Interest on drawings under Fluctuating Capital Accountmethod is treated as: