Which of the following is correct in respect of interest on drawings of the partners?
Answer & explanation
Correct answer: option 4
The correct answer is option 4- All of the above.
The partnership agreement may also provide for charging of interest on money withdrawn out of the firm by the partners for their personal use. No interest is charged on the drawings if there is no express agreement among the partners about it. However if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period for which drawings have been made. Charging interest on drawings discourages excessive amounts of drawings by the partners. It is an expense to the partners, hence is debited to the Partner's Capital Account. On the other hand, Interest on drawing of the partners is an income for the firm.