If Odukoya takes money out of business bank account for his own private use; the effect of the transaction is?

A. increase in assets and increase in capital
B. increase in liabilities and decrease in capital
C. decrease in capital and increase in assets
D. decrease in capital and decrease in assets

Correct Answer:

Option C – decrease in capital and increase in assets

Explanation

Drawings is the withdrawals from a business by a business owner for his personal use. It represents a reduction of owners’ equity (capital) in the business.

Drawings account have a debit balance which increases assets (remember in the balance sheet, assets are recorded on the debit side of the account while liabilities have a credit ballance). Hence drawings would reduce owners capital and increase the asset balance.