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The book says:
Where such personal items of receipts or payments are made the following adjustments should be made :
a. Receipts should be set off against drawings.
Dr Bank
Cr Drawings
b. Payments should be charged to drawings :
Dr Drawings
Cr Bank
________________________________Could you explain the above two entries?
Why do they credit drawings for receipts?
why don’t they credit capital for
receipts ?I don’t get it.
Thanks!
Capital and drawings are linked. At the start of a business, capital is introduced. If the owner takes money out, this is usually called ‘drawings’ ie withdrawing capital.
Posting money taken out to a drawings account allows the owner to keep track of how much has been withdrawn, perhaps to ensure not too much is removed. However, at the end of the day:
Capital c/f = Capital b/f + profit – drawings.
Ok!
If the owner invests money in the business. Then, what would be the appropriate entry to make?Dr Bank
Cr CapitalOr
Dr Bank
Cr DrawingsAs You said both are linked. If the capital is increased or the drawings are deducted with the amount of receipts,there is no problem.
It’s like:
Capital (4) less drawings (1)=3
Receipts = 1
Capital (4+1) less drawings(1)= 4
Or
Capital (4) less drawings (1 minus 1)= 4
The result is same for both.
Either the capital should be increased with the amount of receipts or drawings should be reduced with the amount of receipts. It does not matter.
Am I right?
Investing capital Dr Bank Cr Capital.
Drawings are have a negative effect on capital. Instead of having a drawings account you could simply Dr capital for amounts taken out.
The drawings account is really just an administrative convenience to keep track of amounts taken out as that acts like the owner’s award instead of a salary taken out.
Got it!
Thanks!It it OK not to maintain drawings account and just simply DR and CR capital account for receipts and payments?
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