Interest on drawing in sole proprietorship

interest on drawing in sole proprietorship
Replies (10)
Quick Summary
This discussion clarifies the concept of charging interest on drawings in a sole proprietorship. It explains the accounting entries involved, such as debiting the owner's debtor account and crediting interest on drawings. The business entity concept is highlighted, emphasising the separation of owner and business transactions, and how charging interest discourages excessive withdrawals that could harm business operations and creditors. It also touches upon whether drawings need to be repaid, with the consensus being yes, as it's treated like a loan, and briefly discusses the owner's ability to take a salary.

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(Being owner withdrawn cash from business capital or profits which is lying in the bank)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

 

 

Why interest on drawing is charged in sole proprietorship

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. 

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

YES he has to repay because it is a loan

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 ??

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 

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

Yes, proprietor draws salary just like employee draws salary. 

Does it is considered as drawing??

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