Capital & Drawings Accounts
In this lesson, we will learn how to record transactions when the sole proprietor introduces additional assets into the business or withdraws assets for personal use. We will also learn how to record these transactions in the journal and prepare the Capital and Drawings accounts.
Related Lessons:
Recording in the Drawings Accounts
In a sole proprietor business, drawings are the money or assets the owner takes out of the business for personal use.
For example, if the owner withdraws cash, inventory, or equipment for themselves, it is recorded as drawings.
Drawings reduce the owner’s investments in the business. Therefore, it is a Debit account.
To record drawings of assets by the owner, we debit drawings and credit the asset that the owner withdraws.
Dr Drawings
Cr Assets accounts
At the end of the accounting year, balances in the Drawings account are transferred to the Capital account to reflect the reduce in investment by the owner.
Dr Capital
Cr Drawing
Recording in the Capital Account
In a sole proprietor business, capital are the money or assets the owner contributes to the business.
For example, if the owner brings in personal motor vehicle for business use, or pays for a business debt using personal funds, these are recorded as capital.
Capital account is the opposite of Drawing account. Therefore, it is a Credit account.
To record the contribution of assets by the owner,
Dr Assets accounts
Cr Capital
When the owner pays for business expense or debt using personal funds,
Dr Expense or Liability accounts
Cr Capital
Being the sole owner of the business, at the end of the accounting year, profits or losses made by the business belongs solely to the owner.
Profit made increases the owner’s claim on the business, and we
Dr Income summary
Cr Capital
Losses made reduces the owner’s claim on the business, and we
Dr Capital
Cr Income summary
In the Statement of Financial Position, only the final amount of capital is presented in the owner’s equity.