Atharv Sankliya (375 Points)22 October 2021
Charging interest on drawings is a means of discouraging partners from withdrawing excessive amounts from the business. From this, it follows that interest on drawings is a debit entry in the partners’ current accounts and a credit entry in the appropriation account.
Please be more clear about recoding in appropriation? Txs
I meant did the partner withdraw the money as loan or gave loan to company? Txs
Replied 23 October 2021
Occasionally a partner will make a loan to a partnership in addition to investing capital. Such loans will usually earn interest, but that interest is an expense of the business and will have to be deducted from profits before they are appropriated to the partners. All that’s happened is that the business has borrowed form a partner rather than borrowing form a bank. Bank interest would be an expense, so interest paid on loans form partners is an expense. Note carefully the two types of interest and their treatment: Interest on partners’ capital: not an expense and not deducted from profits. This is part of the appropriation of profits. Interest on loans from partners: an expense of the business that has to be deducted to find the profits. Then appropriation can begin.