Interest on Drawings

Many times during the operation of business, the owner may take out some cash from the business for his personal use. These withdrawals from the business are considered as Drawings.  Considering the fact that the business is a separate accounting entity, it charges an interest on the drawings to the owner.

Adjusting Entries

 

Drawing Account  Dr.
  Interest on drawings account  
(Being interest charged on drawings)  

Accounting Treatment

Interest on drawings is an income for the business and appears on the Credit side of the Profit and Loss Account.

Interest on drawings is an expense for the proprietor and thus it is deducted from the Capital Account in the Balance Sheet.

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