In this second run-through of the drawings example we're going to delve deeper and work out the full journal entry.
For the earlier, simpler lesson on this transaction without the journal entry, where we just go over which accounts are affected and what the effect on the accounting equation is, see the first lesson on the drawings example.
Capital vs Drawings
Just as the owner can invest assets in the business from his personal possessions – so too can he remove assets from the business for personal use.
Remember that the investment of assets in a business by the owner is called capital.
When the owner removes assets from his business, we call this by another name. We call this drawings.
This is because the owner withdraws assets.
Drawings are the exact opposite of capital.
Drawings Example and Journal Entry
Okay, so let's look at our original drawings example:
d) George Burnham is running short of cash at home. He needs some money to buy his daughter a bicycle for her birthday (i.e. for personal use). He decides to withdraw $500 from the business bank account. What is the impact on the equation for George’s Catering?
So, what has happened here?
First of all, bank has now decreased by $500.
As with the previous example, when an asset decreases, that asset is credited, as assets increase on the debit side and decrease on the credit side.
The owner‘s stake in the assets (owner's equity) has also decreased.
The owner’s equityincreases on the credit side. Therefore, the owner’s equity decreases on the debit side.
So what do we do with the owner’s equity? We debit it.