An owner withdraws Rs. 20,000 cash for personal use from a sole proprietorship. What is the immediate accounting effect?
Correct answer: B. Cash and owner's equity decrease
- A. Cash and profit both decrease
- B. Cash and owner's equity decrease
- C. Expenses and liabilities increase
- D. Revenue and owner's equity increase
Explanation
A withdrawal reduces the business's cash and the owner's equity. It is treated as drawings, not as a business expense, so it does not directly reduce reported profit.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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