Question

When cash is withdrawn in sole proprietor business _________.

• A. it will affect shareholder account
• B. it will affect capital account
• C. it will affect liability account
• D. it will affect expense account

Answer 1

Answer: (C)

it will affect liability account

Separate entity concept defines that the owner and the business are treated two separate business entity. Hence an amount contributed by the the owner is considered as liability. Capital is shown as liability.

On similar lines, Cash withdrawn by the proprietor is considered as drawings and this will reduce the liability.