Journal Entry for Interest on Drawings
When Susmita pays interest on her drawings, it reflects the amount drawn from the business for personal use. In this case, she has drawn ₹8,000 and paid 15% interest on it. The journal entry will record the interest expense incurred.
Calculation of Interest
- Interest = Principal Amount × Rate × Time
- Principal Amount = ₹8,000
- Rate = 15%
- Time = 1 year
- Interest = 8,000 × 15/100 = ₹1,200
Journal Entry
The journal entry to record the interest on drawings is as follows:
1. Debit: Interest on Drawings Account ₹1,200
- This represents the expense incurred by Susmita for using the funds from the business.
2. Credit: Susmita’s Capital Account ₹1,200
- This signifies that the amount will reduce her capital in the business since it is considered a withdrawal.
Complete Journal Entry
- Date: [Date of transaction]
- Description: Interest on Drawings
- Debit: Interest on Drawings Account ₹1,200
- Credit: Susmita’s Capital Account ₹1,200
Importance of Recording Interest on Drawings
- Accuracy: Ensures the financial records accurately reflect the costs associated with personal withdrawals.
- Clarity: Provides clarity in the capital account, indicating that the funds were used for personal purposes.
- Financial Management: Helps in assessing the financial position and managing personal withdrawals effectively.
In summary, the journal entry for the interest paid on drawings is crucial for maintaining transparency and accuracy in financial records.