Is Drawing an asset or Liability


In sole proprietorship business, what is the nature of drawing for business? Is it asset or repayment of capital to the proprietor or anything else?

Harish Sharma from India

Harish Sharma! Drawing is neither an asset or liability of business. It is just personal expense. You know, businessman starts his business with capital. But his  business needs  money before generating the profit, he can easily take money from business. It means, he need money for personal expenses. By taking money in the form of drawing, his capital will decrease. So, we show it as deduction of capital in the balance sheet. It will be doubtful, if you will deem it as an asset or liability.

(A) It is not an asset because it does not give benefit to business. Businessman gets only personal benefit from drawing. For example, Mr. A's capital Rs. 5,00,000. He takes RS. 2,00,000 for buying his personal car through drawing. Car is personal asset not business asset. By taking Rs. 2,00,000 for personal use is just decrease of capital of business. Now, business will be operated with Rs. 3,00,000 instead of Rs. 5,00,000.

( B) It is not a liability of business. Capital is the liability of business. If businessman take his own capital in the form of drawing, it will just decrease of liability of business. If we take above example, business has to pay just Rs. 3,00,000 to Mr. A because Mr. A has already taken Rs. 2,00,000 in the form of drawing.

Vinod Kumar

Educator

Prof. Vinod Kumar is an Indian Educator, Motivational Speaker, Naturopathic Practitioner and Entrepreneur . He is the founder of Svtuition... read more »

2 comments:

  1. bhoj raj adhikariMay 17, 2012 at 1:12 AM

    This answer is very powerful . everybody can easily understand and convinces . i am very grateful to the author.

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