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Interest on drawing in sole proprietorship

Atharv Sankliya (1359 Points)

28 October 2021

interest on drawing in sole proprietorship

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yasaswi gomes (My grammar is 💯 good I) (7296 Points)
Replied 28 October 2021

By Capital/Profits a/c

To Bank a/c

(Being owner withdrawn cash from business capital or profits which is lying in the bank)

By Owner debtor a/c

To Interest on drawings

(Cash paid by owner as interest to business for borrowing capital)

By Bank a/c

To Debtor a/c

(Principle returned by the owner)

By Bank a/c

To Capital a/c

(This is to reconcile capital account after the cash is received)

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Atharv Sankliya (1359 Points)
Replied 28 October 2021

Why interest on drawing is charged in sole proprietorship

yasaswi gomes (My grammar is 💯 good I) (7296 Points)
Replied 29 October 2021

There is a concept called as business entity concept. It’s job is to separate owner transactions from business transactions. So this loan is owner transaction. Hence the company is charging him interest so that he will not frequently borrow from profits. Because company need cash to operate.

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Atharv Sankliya (1359 Points)
Replied 29 October 2021

Does he has to repay the amount of drawing the owner withdraw

yasaswi gomes (My grammar is 💯 good I) (7296 Points)
Replied 29 October 2021

YES he has to repay because it is a loan

Atharv Sankliya (1359 Points)
Replied 29 October 2021

So suppose there is man mr.x has own business he withdraw money from his business to meet his personal expenses & the drawing from business is the only way of his income so how he repay the drawing to the business ??

yasaswi gomes (My grammar is 💯 good I) (7296 Points)
Replied 29 October 2021

You are also correct. This is compulsory for partnerships. Since you own everything in sole proprietorship, maybe you can draw without interest. However, I am not too deep into Company laws and I just guessed that money must be maintained without using. If drawing is the way of salary, no problem. But what if the owner uses up all the cash and brings problems to creditors. Even if he gets bankrupted, he cannot pay everyone. In this wake, I imagined that if interest is imposed, drawings will be less. I dont know what sections deal with minimum capital criteria

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Atharv Sankliya (1359 Points)
Replied 29 October 2021

Can owner take salary from sole proprietorship and does this salary is considered as drawing?? because money taken from business for personal use is drawing