What is the effect of drawing on capital account?

Increase capital balance

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Decrease capital balance

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Neutralize capital balance

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None of the above

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Solution

The correct option is B Decrease capital balance
Business Entity concept defines that business and businessman are two separate entities in the eye of law. Hence anything contributed by the owner as capital in the business is treated as liability.

Same way, if anything is withdrawn by the owner for personal purposes are considered as drawings and it decreases the capital of the owner.

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Similar questions

At the year-end, the interest on drawings ____ the capital balance & the interest on capital ______ the capital balance.

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