Welcome to our drawings example. In this tutorial we're going to learn what drawings is and how it relates to owner's equity and capital, and then use our sample business, George's Catering, to see how it affects the accounting equation.
Capital simply means the investment of assets in a business by the owner.
Just as the owner can invest assets in the business – 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.
Example of Drawings
The accounting equation for George's Catering stood as follows after our first few transactions (investing capital, taking out a bank loan and purchasing baking equipment):
Please note: In the explanation below we'll cover the accounts that are affected and what happens with the accounting equation - but not the journal entry. To see the full debit and credit entry for this example, click through to our advanced lesson Journal Entry for Drawings, where we'll cover this in detail.
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?
The impact on the accounting equation for George's Catering is the exact opposite of what happens with 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). The bank loan of $5,000 is still $5,000 - nothing has changed with this.
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.