Adjusting Entries for Interest on Drawings

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 12, 2023

In accounting, drawings are withdrawals of cash, merchandise, or other items from the business by the owner for their personal use.

In certain cases, drawings are treated as loans to the owner, with interest charged at the normal rate.

Accounting Treatment

The amount of interest charged on drawings is an indirect income of the business. On the other hand, it is a personal expense of the owner.

Interest in drawings has the following two effects on final accounts:

  • It is also a personal expense of the owner. Therefore, it will be added to the drawings account in the balance sheet and ultimately will be deducted from the capital.

Adjusting Entry

Interest on drawings is a form of business income. Therefore, it is credited in the books of the business. The proper journal entry to record interest on drawings is given below:

Adjusting Entry Drawings

Example

On 1 January 2016, Mr. Black withdrew $2,000 in cash from his business for his personal use.

The amount was not returned to the business until the end of the accounting period on 31 December 2016. The interest on drawings is to be charged @ 10% p.a.

Required: What adjusting entry should be made to record the interest on drawings at the end of the accounting period?

Solution

Adjusting Entry For Drawings Solution

Interest on drawings = 2,000 × 0.1 = 200

Note for Students

In the example above, we calculated interest on drawings for the full year because the money was drawn for a full year.

If the withdrawal date was not given in the question, the interest on drawings would be calculated based on the whole amount for six months, assuming that the money is drawn throughout the year.

Adjusting Entries for Interest on Drawings FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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