Interest on Drawings transaction  is charged from the owner for the withdrawals made by him. Therefore, it is an expense for the owner and an income for the business. So, it is shown as a deduction as well as addition to Owner's Equity in the Accounting Equation.

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The accounting equation is the foundation of accounting, and it represents the relationship between assets, liabilities, and equity. The equation is as follows:

Assets = Liabilities + Equity

When a business owner takes money out of the business for personal use, it is called a drawing. The drawing reduces the owner's equity in the business, which affects the accounting equation.

Accounting Equation and Interest on Drawing Transaction:

Impact on Equity:

When a drawing is made, it reduces the owner's equity in the business. If the drawing is made with interest, the interest amount will be debited to the drawing account, which will further reduce the equity.

Impact on Liability:

The drawing transaction does not have any impact on liabilities.

Impact on Assets:

The drawing transaction reduces the cash balance, which is an asset. If the drawing is made with interest, the interest amount will be credited to the cash account, which will increase the cash balance.

Journal Entry:

When a drawing is made with interest, the journal entry will be as follows:

Drawing A/C Debit

Interest on Drawing A/C Debit

To Cash A/C Credit

Conclusion:

The accounting equation is a fundamental concept in accounting, and it represents the relationship between assets, liabilities, and equity. When a business owner takes money out of the business for personal use, it is called a drawing. The drawing reduces the owner's equity in the business, which affects the accounting equation. If the drawing is made with interest, the interest amount will be debited to the drawing account, which will further reduce the equity. The journal entry for a drawing made with interest will include the drawing account, interest on drawing account, and cash account.