The effects of solvation and entropy play a critical role in determining the binding free energy in protein-ligand interactions. Despite the good balance between speed and accuracy, no current knowledge-based scoring functions account for the effects of solvation and configurational entropy explicitly due to the difficulty in deriving the corresponding pair potentials and the resulting double counting problem. In the present work, we have included the solvation effect and configurational entropy in the knowledge-based scoring function by an iterative method. The newly developed scoring function has yielded a success rate of 91% in identifying near-native binding modes with Wang et al.'s benchmark of 100 diverse protein-ligand complexes. The results have been compared with the results of 15 other scoring functions for validation purpose. In binding affinity prediction, our scoring function has yielded a correlation of R(2) = 0.76 between the predicted binding scores and the experimentally measured binding affinities on the PMF validation sets of 77 diverse complexes. The results have been compared with R(2) of four other well-known knowledge-based scoring functions. Finally, our scoring function was also validated on the large PDBbind database of 1299 protein-ligand complexes and yielded a correlation coefficient of 0.474. The present computational model can be applied to other scoring functions to account for solvation and entropic effects.