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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Which of the following correctly describes the treatment of interest on drawings charged to a sole proprietor?

Interest on drawings is an income of the business, credited to the Profit and Loss Account, and the same amount is debited to the proprietor's drawings, increasing total drawings and reducing capital.

  1. AIt is an income in the Profit and Loss Account and is added to the proprietor's drawingsCorrect
  2. BIt is an expense in the Profit and Loss Account and is added to capital
  3. CIt is an income in the Profit and Loss Account and is added to capital
  4. DIt is an expense in the Trading Account and is deducted from drawings

Explanation

Interest on drawings is charged to the proprietor, so it is the business's income and is credited to the Profit and Loss Account. The proprietor's drawings account is debited, which increases drawings and reduces capital. It is not an expense and does not appear in the Trading Account.

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