Journal Entries for Charging Interest on Drawings

The following are the journal entries for charging interest on drawings worth Rs 1000:

1. Initial Transaction:

When the owner or proprietor withdraws money from the business for personal use, it is called drawings. In this case, we assume that the proprietor withdrew Rs 1000 from the business for personal use.

The journal entry to record this transaction is:

Drawings A/C Dr 1000
To Cash/Bank A/C 1000

2. Charging Interest on Drawings:

When the proprietor withdraws money from the business, he or she is essentially borrowing money from the business. If the proprietor does not pay back the money within a reasonable time, the business can charge interest on the amount withdrawn.

In this case, let us assume that the business charges 10% interest on the drawings of Rs 1000.

The journal entry to record this transaction is:

Interest on Drawings A/C Dr 100
To Drawings A/C 100

3. Entry for payment of interest:

If the proprietor pays back the amount withdrawn along with interest, the following journal entry is made:

Cash/Bank A/C Dr 1100
To Drawings A/C 1000
To Interest on Drawings A/C 100

Explanation:
- The first entry records the initial transaction of the proprietor withdrawing Rs 1000 from the business for personal use.
- The second entry records the business charging 10% interest on the drawings of Rs 1000.
- The third entry records the payment of the amount withdrawn along with interest.

In conclusion, it is important to charge interest on drawings to ensure that the proprietor does not take advantage of the business's funds. Interest charged on drawings is recorded in the Interest on Drawings account, which is a sub-account of the proprietor's Drawings account.

Drawing A/c Dr. 1000
To interest on drawing 1000