When a business is being helped by a certain person, it can be taken that due to immediate personal need, an amount of money can be withdrawn from the company account. Hence, it can be stated that drawings are that amount which is forwarded by a firm to its proprietor’s for personal usage.
If it is taken that a firm pays interest on capital which is the amount that has been invested by proprietor, hence it is completely acceptable that amount which has been withdrawn by the proprietor should also be subjected to paying of interest, since this would come as an interest for the business.
So, that interest that would be generated in this case is taken to be the interest on drawings and hence added to credit side of accounts. However, taken that this capital would increase with drawing, so capital account has to be debited. Also, any type of drawing or interest on drawing would be placed on drawing account.
While division of accounts, interest on drawings would be placed on credit side of the profit and loss account, but it will also be said to be deducted from capital on liabilities side.
However, if this interest on drawings is taken on Trial Balance, then it can also be taken that balance of capital account has been adjusted. So, in this case, interest on drawings would be placed at credit side of profit and loss account.
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