Please explain me product method to calculate interest on drawing and tell me the formula of interest on drawing calculating with the use of method product method. And please tell me why 1/12 comes in the formula of product method?

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Answer

Product Method for Calculating Interest on Drawing

The product method is a technique used to calculate interest on drawings in accounting. It is based on the assumption that the owner's drawings are made evenly throughout the year, and the interest is calculated on the average amount of drawing for the year.

Formula for Interest on Drawing using Product Method

The formula for calculating interest on drawing using the product method is as follows:

Interest on Drawing = Average Drawings × Rate of Interest × Time

Explanation of 1/12 in the Formula

- The 1/12 in the formula represents the time factor. Since the assumption is that the owner's drawings are made evenly throughout the year, the time factor is calculated on a monthly basis.
- The 1/12 represents one month out of the total 12 months in a year. This fraction is used to convert the annual rate of interest into a monthly rate of interest, making the calculation more accurate.
- By using 1/12 in the formula, we are able to calculate the interest on drawing for a specific period of time, such as one month, three months, or six months, depending on the requirement.

In conclusion, the product method is a useful technique for calculating interest on drawings in accounting. By understanding the formula and the significance of 1/12 in the calculation, one can accurately determine the interest payable by the owner on their drawings.

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