Calculating interest on drawings is an important concept in partnership accounting. When a partner withdraws a fixed amount at regular intervals, we can use the average period method to simplify the interest calculation.

Understanding the Drawing Scenario

In this specific problem, a partner withdraws ₹7,500 at the end of every two months for the entire year. The interest rate on these drawings is 8% per annum. We need to find the total interest on drawings for the year.

Step-by-Step Calculation of Interest on Drawings

Step 1: Determine the Total Number of Drawings

The drawings are made at the end of every two months for a year (12 months). Let's list when the drawings occur:

• End of month 2
• End of month 4
• End of month 6
• End of month 8
• End of month 10
• End of month 12

So, there are a total of 6 drawings made during the year.

Step 2: Calculate the Total Amount of Drawings

The amount withdrawn each time is ₹7,500. Since there are 6 drawings:

Total Drawings = Amount per drawing $\times$ Number of drawings

Total Drawings = ₹7,500 $\times$ 6

Total Drawings = ₹45,000

Step 3: Determine the Average Period for Interest Calculation

When a fixed amount is withdrawn at the end of equal intervals (like every two months), we use the average period method. The average period is calculated as:

Average Period $= \frac{\text{Time left after 1st drawing} + \text{Time left after last drawing}}{2}$

Let's find the time left:

• Time left after the first drawing (at the end of month 2) = 12 months - 2 months = 10 months
• Time left after the last drawing (at the end of month 12) = 12 months - 12 months = 0 months

Now, calculate the average period:

Average Period $= \frac{10 \text{ months} + 0 \text{ months}}{2} = \frac{10 \text{ months}}{2} = 5 \text{ months}$

Step 4: Calculate the Interest on Drawings

Using the total drawings, interest rate, and average period, we can calculate the interest on drawings:

Interest on Drawings $= \text{Total Drawings} \times \text{Rate of Interest} \times \frac{\text{Average Period}}{12 \text{ months}}$

Interest on Drawings $= ₹45,000 \times \frac{8}{100} \times \frac{5}{12}$

Interest on Drawings $= ₹45,000 \times 0.08 \times \frac{5}{12}$

Interest on Drawings $= ₹3,600 \times \frac{5}{12}$

Interest on Drawings $= \frac{3,600 \times 5}{12}$

Interest on Drawings $= \frac{18,000}{12}$

Interest on Drawings $= ₹1,500

The calculated interest on drawings is ₹1,500.

Revision Table: Average Period for Drawings

Here's a quick reference for the average period when a fixed amount is withdrawn regularly throughout the year:

Additional Information on Interest on Drawings

Drawings: Drawings refer to the amount of cash or goods withdrawn by a partner from the business for personal use. In accounting, drawings reduce the partner's capital.

Interest on Drawings: In many partnership agreements, partners are charged interest on their drawings. This is typically done to discourage excessive withdrawals and to compensate the firm for the capital withdrawn by partners that could have been used in the business. It is an income for the firm and is credited to the Profit and Loss Appropriation Account. It is debited to the partner's Capital Account or Current Account.

Average Period Method: This method is used when drawings of a fixed amount are made at regular intervals (beginning, middle, or end of month, quarter, half-year, etc.). Instead of calculating interest on each drawing for the specific period it was outstanding, we calculate interest on the total drawings for an average period. This simplifies the calculation significantly.