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What is the effect of drawings on the final accounts of a sole trader?
What is the effect of drawings on the final accounts of a sole trader?
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Practice Questions
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Q1
What is the effect of drawings on the final accounts of a sole trader?
Increase net profit
Decrease net profit
No effect on net profit
Increase total assets
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Drawings decrease the net profit as they are considered a distribution of profits.
Questions & Step-by-step Solutions
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Q
Q: What is the effect of drawings on the final accounts of a sole trader?
Solution:
Drawings decrease the net profit as they are considered a distribution of profits.
Steps: 5
Show Steps
Step 1: Understand what drawings are. Drawings are money or assets taken out of the business by the sole trader for personal use.
Step 2: Recognize that drawings are not an expense of the business. They are not included in the profit and loss account.
Step 3: Know that drawings reduce the amount of profit available to the owner. This is because they are considered a distribution of profits.
Step 4: Realize that when calculating the final accounts, the net profit is shown before drawings are taken out.
Step 5: Understand that the final amount of profit left after drawings is what the sole trader retains in the business.
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