Now let's look at an example of drawings (I'll explain what this is below):
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?
Well, it's the exact opposite of our first example:
Just as the owner can invest assets in the business (from his personal possessions) – capital – so too can he remove them 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 is the exact opposite of capital.
The assets of the business have decreased, and the owner‘s stake in the business assets has decreased, so assets and owner’s equity both decrease.
Notice again that liabilities (debts to external parties) are unaffected. Their stake will be the same as it was before this transaction ($5,000).
George’s Catering now consists of assets of $19,500. Bank has now decreased by $500. So assets are now made up of baking equipment to the value of $12,000 and cash of $7,500.
If you are having trouble with this lesson, return to the earlier lesson on What is Owners Equity? to review what owners equity means in terms of the accounting equation.