What is the treatment of drawings in the final accounts of a sole trader?
Practice Questions
1 question
Q1
What is the treatment of drawings in the final accounts of a sole trader?
Recorded as an expense
Recorded as a liability
Recorded as a reduction in equity
Not recorded at all
Drawings are recorded as a reduction in equity in the final accounts of a sole trader.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the treatment of drawings in the final accounts of a sole trader?
Solution: Drawings are recorded as a reduction in equity in the final accounts of a sole trader.
Steps: 5
Step 1: Understand what drawings are. Drawings are the money or assets that a sole trader takes out of the business for personal use.
Step 2: Know that drawings are not considered an expense of the business. They are not deducted from income when calculating profit.
Step 3: Recognize that drawings reduce the owner's equity in the business. Equity is the owner's share of the business after liabilities are subtracted from assets.
Step 4: In the final accounts, specifically in the balance sheet, you will show the total amount of drawings as a deduction from the owner's equity.
Step 5: Ensure that the drawings are recorded in the capital account, which reflects the owner's investment and withdrawals from the business.
