I n   t h i s   q u e s t i o n ,   i n   i n t e r e s t   o n   c a p i t a l   w h y   1 12   i s   m u l t i p l i e d ?   I s   p r o d u c t   m e t h o d   n o t   f o l l o w e d   o n l y   f o r   i n t e r e s t   o n   d r a w i n g s ?

Dear Student

In interest on capital using product method, it is multiplied by 1/12 because,
See here capital is multiplied by the number of months it has been used, therefore to calculate the effective capital throughout the year we shall have to divide it with 12. And Interest is provided on Effective capital present throughout the year.

For e.g it Rs 1,00,000 was opening capital and if it has been used for the whole year then, its product would have been 1,00,000 x 12 = 12,00,000. and while calculating Interest on capital we have to divide it by 12 to get effective capital throughout the year i.e Effective capital = 12,00,000 / 12 = 1,00,000/- and Interest = 1,00,000 x 6% = 6,000/-

Product method can be used for both interest on capital or interest on drawings.

Hope this helps


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