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CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

A sole proprietor's trial balance includes Drawings ₹30,000 and Capital ₹5,00,000. Net profit for the year is ₹90,000. Where do drawings appear in the final accounts, and what is the closing capital?

Drawings are deducted from capital in the Balance Sheet, not charged as an expense. Closing capital is opening capital 5,00,000 plus net profit 90,000 less drawings 30,000, which equals ₹5,60,000.

  1. ADeducted from capital in the Balance Sheet; closing capital ₹5,60,000Correct
  2. BDebited to Profit and Loss Account; closing capital ₹5,90,000
  3. CAdded to capital in the Balance Sheet; closing capital ₹6,20,000
  4. DShown as an expense in Trading Account; closing capital ₹5,00,000

Explanation

Drawings are a reduction of the owner's capital, not a business expense. Closing capital = 5,00,000 + 90,000 - 30,000 = 5,60,000. Charging drawings to the Profit and Loss Account is wrong because it would understate profit.

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