What is the journal entry for interest on Drawings?

Journal Entry for Interest on Drawings is-

So as per the modern approach: From the point of view of business, Interest on Drawings is an Income.

• When there is an increase in the Income, it is credited.
• When there is a decrease in the Income, it is debited.

From the point of view of the proprietor, Interest on Drawings is a Liability.

So as per the modern approach:

• When there is an increase in the Liability, it is credited.
• When there is a decrease in the Liability, it is debited.

So as per the modern approach,  Interest on Drawings is credited because with Interest the income increases for the business. Whereas,  the amount of such interest is a loss from the point of view of the owner/ Proprietor, as such the amount of drawings is increased by the amount of interest and hence the Drawings account is debited.

For Example, Harry charged interest on drawings on Rs 10,000 @ 12% for one year.

Explanation:

Step 1: To identify the account heads.

In this transaction, two accounts are involved, i.e. Drawings A/c and Interest on Drawings A/c.

Step 2: To Classify the account heads.

According to the modern approach: From the point of view of business,  Interest on Drawings is a Revenue A/c and Drawings A/c is an Expense A/c.

Step 3: Application of Rules for Debit and Credit:

According to the modern approach: As Revenue increases because of interest on drawings received by the business, Interest on Drawings A/c will be Credited. (Rule – increase in Revenue is credited).

Drawings A/c is an expense account for the business and as expense increases, Drawings A/c will be debited. (Rule – increase in the expenses is debited).

So from the above explanation, the Journal Entry will be-