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| Interest on Drawings Journal Entry |
When a business owner charges interest on their drawings i.e. withdrawals of fund from the business, This is a way to compensate the business for the use of its funds.
Journal Entry for Interest on Drawings
Interest on Drawings Account Debit
Owner's Drawings Account Credit
- The "Interest on Drawings" account is debited because of the interest expense charged on the owner's drawings.
- The "Owner's Drawings" account is credited because of the balance of the owner's drawings.
This above journal entry reflects the recognition of as an interest in the owner's drawings, with the corresponding reduction of the owner's drawings account. It's essential to prepare a clear agreement regarding the charging of interest on drawings, and the specific terms such as the interest rate should be agreed upon by the business owner.
