Interest on drawing refers to the interest charged on funds withdrawn by the owner(s) of a business for personal use. It is similar to interest on a personal loan, but in this case, the owner(s) is borrowing from the business. It is considered a non-operating expense, and it is recorded in the company’s income statement.
For example, the owner of a business withdraws ₹ 20,000 from the business for personal use and the business charges an annual interest rate of 5% on the withdrawal. The interest expense would be calculated as follows:
- Interest expense = Principal x Interest rate
- Interest expense = ₹ 20,000 x 5% = ₹ 1,000
This means that the business would record an expense of ₹ 1,000 in the first year, as interest on drawing and the same amount each year, until the amount borrowed is repaid.
It’s important to note that interest on drawing is not a standard or required expense, and not all businesses charge interest on withdrawals by the owner(s). It depends on the terms of the business or the agreements between the owner(s) and the business. However, when it is charged, it should be recorded as a separate expense in the income statement, to be able to track it clearly. Also, it’s important to be aware of this interest expense as it could impact negatively on the financial performance of the business.
