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ACCA Applied Knowledge · Financial Accounting · Double-entry bookkeeping principles including the maintenance of accounting records

An entity pays $3,000 of its owner's personal insurance from the business bank account. The business is a sole trader. What is the correct double entry?

Debit drawings and credit bank for $3,000. A personal expense of the owner paid from business funds is a withdrawal of equity, not a business expense, so it is recorded as drawings and does not reduce the business's profit.

  1. ADebit Insurance expense $3,000; Credit Bank $3,000
  2. BDebit Drawings $3,000; Credit Bank $3,000Correct
  3. CDebit Bank $3,000; Credit Drawings $3,000
  4. DDebit Capital $3,000; Credit Insurance expense $3,000

Explanation

Payment of the owner's personal costs from business funds is drawings, which reduces equity. Drawings are debited and bank credited. Charging insurance expense would wrongly reduce business profit.

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