What Two Accounts Are Affected When A Business Pays Cash Or Sends Cheque / Check To The Owner For Personal Use

Cash Withdrawal Or Withdrew Cash By Cheque / Check From Business For Personal Use Of The Sole Owner / Sent Check To The Owner For Personal Or Private Use

When a business owner withdrew cash or bank from business for his own personal use, then one account which is affected is cash account or bank account and other one is drawings account.

Actually, a business pays cash or pays cash through check / cheque to sole proprietor from time to time due to personal or private use of owner of the business and in that case this transaction has no concern with business affairs according to Business Entity Concept. So, Drawings Account is created to record transaction related to personal expenses of the owner in order to separate this matter from business own’s accounts.

Example: Mr. A is a sole proprietor withdrew cash Rs. 6000 from business for his own personal use. What is the journal entry and how this transaction affected the accounting equation?

The journal entry to record for withdrew of cash of Rs. 6000 from business for personal use is shown below:

                                                                             Drawings a/c  6000

 

                                                                                                           Cash a/c  6000

 

                                                                            (Withdrew Cash For Personal Use)

Note: If Mr. A withdrew cash by check, then we credit bank account instead of cash account.

Effect Of Withdrew Of Cash From Business For Proprietor Own’s Personal Use On The Accounting Equation

                                                        Assets   =   Liabilities   +   Owner’s Equity

                                                        -Cash     =           0           +      (-Drawings)

                                                        -6000     =           0           +          (-6000)

                                                         -6000    =           0           +            -6000

As Drawings is increasing i.e., it is the withdrawal of cash from business for owner’s personal use and also as drawings is a Contra Capital Account, so it is deducted from owner’s equity by Rs. 6000 on the right side of the accounting equation. The cash is decreasing as it is going out of the business for owner’s personal use, so it is deducted from assets by Rs. 6000 on left side of the accounting equation and hence the accounting equation remains in balance.feed

Note: The result of withdrew cash by check for personal use is the same as in case of cash withdrew for personal use. The only difference is that, we replace bank account with cash account and the rest of the result will be the same as in the case of cash withdrew for personal use.