If The Business Owner Withdraws Cash For Personal Use What Will Be The Effect On Capital

Paid Cash To Sole Owner / Sole Proprietor By Business For Personal Use Journal Entry And Accounting Equation

When a sole proprietor or the business owners withdraw cash from the business for personal use or private use, then the Capital is decreased as withdrawing of cash from business for his own personal use creates Drawings Account which is a Contra Capital Account i.e., it is deducted from capital account.

For example, Mr. X as a sole proprietor withdrew cash of Rs. 10000 from business for his own personal use, then the journal entry to record is shown below:

                                                                       Drawings a/c  10000

 

                                                                                                  Cash a/c  10000

 

                                                (Owner’s (Mr. X) Withdrawal Recorded)

 

We assume that, the Financial Statement of the business of Mr. X, shows the following information:

 

Assets = 50000 Liabilities = Rs. 15000 Capital = Rs. 35000

 

The effect of this transaction on Accounting Equation is shown below:

How To Treat Drawings In Accounting Equation

Assets = Liabilities + Owner’s Equity

                                                                           50000  =      15000       +        Capital

                                                                           50000 =       15000       +         35000

                                                                50000 -Cash =       15000      +  (35000 +Drawings)

                                                              50000 -10000 =       15000      +     (35000-10000)

                                                                           40000 =       15000      +        25000

                                                                           40000 =       40000

So, we see that capital account is decreased from Rs. 35000 to Rs. 25000 due to cash withdrew of Rs. 10000 from business by Mr. X for his private purposes.