Interest on drawings is a charge made to a partner for money taken out of the business, calculated at a rate the agreement states. The partner’s current account is debited, and the appropriation account is credited.
It belongs to partnership accounting and follows the partner salary lesson.
How is the interest calculated?
When a question gives dates, use simple interest over the time from the date of drawing to the year-end:
interest = drawings × rate × months outstanding ÷ 12
When a question gives only a total and a flat percentage, apply the percentage as stated. Never assume an average date unless the question tells you to.
How to record it, step by step
- Find each partner’s interest using the supplied rate and timing.
- Credit the appropriation account with the total, which adds to the profit available to share.
- Debit each partner’s current account with their own interest.
- Share the residual as usual after any salary and interest on capital.
- Check that the partners’ totals add up to the net profit.
Worked example
Zul and Mala are partners. The agreement charges 6% a year on drawings, and the year ends on 31 December.
Zul drew RM4,000 on 1 March and RM2,000 on 1 September. Mala drew RM9,000 on 1 July.
Net profit is RM40,000 and the ratio is 1:1.
Zul: RM4,000 for 10 months = 4,000 × 6% × 10/12 = RM200. RM2,000 for 4 months = 2,000 × 6% × 4/12 = RM40. Total RM240.
Mala: RM9,000 for 6 months = 9,000 × 6% × 6/12 = RM270.
| Appropriation account | RM |
|---|---|
| Net profit | 40,000 |
| Interest on drawings: Zul | 240 |
| Interest on drawings: Mala | 270 |
| Profit available | 40,510 |
| Share: Zul (1/2) | 20,255 |
| Share: Mala (1/2) | 20,255 |
Entries: debit Zul’s current account RM240 and Mala’s RM270, credit appropriation RM510.
Net effect: Zul RM20,255 − RM240 = RM20,015. Mala RM20,255 − RM270 = RM19,985.
Check: RM20,015 + RM19,985 = RM40,000, the net profit. ✓ The interest only moves profit between the partners and never changes the total.
The mistake to watch for
A common slip is to credit the interest to the partner, as if the partner had earned it.
Mistaken entry: Credit Zul’s current account RM240.
The student treated interest on drawings like interest on capital. The partners’ totals become RM20,255 + RM240 + RM20,255 + RM270 = RM41,020, which is RM1,020 more than the net profit.
The correction is to ask who is paying. The partner takes money out, so the partner is charged: debit the current account. Interest on capital is the reverse, because the business pays the partner for money left in.
Check yourself
Try these on paper first, then open each answer.
1. Interest on drawings is 5% of a partner’s total drawings for the year. Drawings are RM8,000. Find the interest.
Show answer
RM8,000 × 5% = RM400.
RM400, debited to the partner’s current account.
2. A partner draws RM6,000 on 1 October. Interest is 8% a year and the year ends on 31 December. Find the interest.
Show answer
Months = 3. Interest = 6,000 × 8% × 3/12 = 480 × 1/4 = RM120.
RM120
3. State the debit and credit for interest on drawings and say what happens to the profit available to share.
Show answer
Debit the partner’s current account; credit the appropriation account. The profit available to share increases by the amount of interest charged.
Where this leads next
Next, reconcile partners’ balances to prove that all the entries agree. The percentage-base explorer helps with the interest step, and the ledger trainer lets you see both sides of each entry.
If the direction of an entry is the part that keeps slipping, our teachers can look at it with you in online one-to-one Accounting tuition.