Day 2: Accounts - Interest Calculations

Introduction

• Second day of Accounts
• Important day, a lot to learn
• Practice and note-taking are essential

P&L Appropriation Account

• Money comes into the firm on the credit side
• Source: Profit or money from Partners
• Importance of Interest on Drawings
• On the debit side: Interest on Capital, Salary, Bonus, Commission, Divisible Profit

Interest on Capital (IOC)

• Always calculated on Opening Capital
• Explained through an example:
  • Example: X invested 1 million rupees in April
  • Interest calculation after withdrawals
• Formula:
  • 1 million at a rate of 10% for 6 months
  • 600,000 at a rate of 10% for 6 months

Interest on Drawings (IOD)

• Interest is calculated when money is withdrawn
• Example and steps:
  • Withdrawals on different dates
  • Different time interest for each withdrawal
• Calculation example:
  • Calculate interest for withdrawals on multiple dates

Methods for IOD Calculation

• Simple Method: Calculate separately for each withdrawal
• Product Method:
  • Total of Product into Rate/100 into 1/12

Special Cases

• Monthly, Quarterly, Half-Yearly Drawings
• Formulas for different scenarios
  • Beginning, Mid, End of month/quarter/half-year
• Shortcuts for same amount and time period

Important Notes

• If no pronouncement is given, then no time period
• Consider the time period only if pronounced

Conclusion

• Complete understanding of IOC and IOD
• Assignment: Practice questions given for IOC/IOD
• Excited for the preparation of the next session