Okay, so let's look at a 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?
Just as the owner can invest assets in the business (from his personal possessions – called capital), so too can he remove assets from the business for personal use.
When the owner removes assets from his business, we call this drawings. This is because the owner withdraws assets.
Drawings are the exact opposite of capital.
Bank has now decreased by $500. As with the previous example, when an asset decreases, that asset is credited, as it increases on the debit side and decreases on the credit.
The owner‘s stake in the assets has also decreased. The owner’s equity increases 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.
The accounting entry is:
This transaction is the exact opposite of our owner's equity example, where Mr. Burnham put assets into the business.
In the entry above we theoretically could have debited capital (this would show that it is decreasing). Drawings, however, is the name used (and the item debited) when assets are taken out by the owner.
In summary, it is quite apparent that:
For every transaction there are two entries.
For every transaction there is a debit.
For every transaction there is a credit.
There are no exceptions.
It should also be quite apparent that the debits and credits are based wholly on the above accounting equation.
Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)
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