If interest charged on drawings is Rs. 3,000, what effect will it have on distributable profit?

Correct answer: It will be added to profit

Interest charged on drawings is treated as income of the firm and is credited to the profit & loss account or to partners' current/capital accounts. Hence it increases distributable profit. Option B is incorrect because interest on drawings is not an expense to the firm but income; option C is incorrect because it is not deducted only from capital — it is recorded as income and credited to partners' accounts; option D is wrong because this income does affect distributable profit. Exam tip: remember ‘‘interest on drawings’’ is income for the firm and thus increases profit available for distribution.