ACCA Applied Knowledge · Financial Accounting · General ledger accounts and journal entries
The owner of a business withdraws $500 cash from the business for personal use. Under the business entity concept, which entry is correct for a sole trader?
Debit drawings and credit cash for $500. Drawings represent the owner taking resources out of the business, reducing equity, and cash decreases. It is not an expense, because the owner and the business are treated as separate and the withdrawal is not a business cost.
- ADebit Drawings $500; Credit Cash $500Correct
- BDebit Cash $500; Credit Drawings $500
- CDebit Salaries expense $500; Credit Cash $500
- DDebit Capital $500; Credit Drawings $500
Explanation
Drawings reduce the owner's equity and are debited to a drawings account; cash falls, so cash is credited. Treating it as salary (C) wrongly charges the statement of profit or loss, as owners of sole traders are not employees of the entity.
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