Glossary
Interest on drawings
A charge partners make on money taken out during the year, discouraging early withdrawals.
What it means
An amount charged to partners on their drawings and added back in the appropriation account, increasing distributable profit.
Example
Interest of RM200 on a partner's drawings is debited to that partner's current account.
Why it matters
It discourages heavy early drawings and shares the cost of doing so fairly among partners.
In practice
Interest on drawings works the opposite way to most appropriations. It is a charge on the partner. It is debited to the partner's current account and added back to profit in the appropriation account, which increases the amount available to share. The aim is to discourage partners from taking money out early and often, because heavy drawings reduce the cash the firm can use.
Suppose Ben withdraws RM6,000 during the year and the agreement sets interest on drawings at 5 per cent. Roughly RM300 is charged to him, depending on when each withdrawal was made.
Compare this with interest on capital. Interest on capital rewards a partner and is credited to them. Interest on drawings charges a partner and is debited to them. It is calculated on drawings, the money actually taken out, not on the capital balance. Because it raises the profit pool, every partner gains when one partner is charged.
If you are unsure which items are added and which are deducted, one of our teachers can set out the appropriation account with you and explain each sign. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.2 Partnerships (page 16).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
Need interest on drawings explained properly?
Tell us your child’s year and board on WhatsApp and we will suggest a first lesson. One-to-one and online, from RM75/hr.
One-hour paid trial · Same-day reply