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CSEET · Fundamentals of Accounting · Preparation of Final Accounts for Sole Proprietorship

Which treatment of the proprietor's personal items is correct when preparing the Profit and Loss Account of a sole proprietorship?

Interest charged on the proprietor's drawings is credited to the Profit and Loss Account as income for the business, with the corresponding debit going to capital. Personal premiums are treated as drawings, and a proprietor's own salary is not charged as a business expense.

  1. AInterest on drawings is credited to the Profit and Loss Account as incomeCorrect
  2. BProprietor's life insurance premium paid by the business is debited to the Profit and Loss Account
  3. CInterest on drawings is deducted from capital as an expense
  4. DProprietor's salary is debited to the Profit and Loss Account

Explanation

Interest charged on drawings is an income to the business, so it is credited to the Profit and Loss Account and debited to the capital account. The life insurance premium is treated as drawings, and a sole proprietor's own salary is not an expense.

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