Free Hindi–English accounting lesson | Rangunwala’s Academy
Cash बाहर गया—लेकिन क्या हर payment Expense है?
A business pays out cash in many situations, but the purpose decides the account. If a sole proprietor withdraws ₹5,000 from business cash for personal use, the business has not incurred an electricity, rent or salary expense. It is Drawings: a reduction in the owner’s claim on the business.
Correct Entry for Personal Withdrawal
Event: The owner of a sole-proprietorship business takes ₹5,000 cash for personal use.
Journal entry:
Drawings A/c Dr. ₹5,000
To Cash A/c ₹5,000
(Being cash withdrawn by the proprietor for personal use)
Cash decreases because money leaves the business. Drawings increases because the proprietor has taken business resources for a non-business purpose. Drawings is normally transferred to, or deducted from, the proprietor’s Capital Account; it does not directly reduce profit through the Profit and Loss Account.
Compare It with a Genuine Business Expense
If the same ₹5,000 is paid in cash for the current period’s office electricity, the purpose is business-related:
Electricity Expense A/c Dr. ₹5,000
To Cash A/c ₹5,000
(Being office electricity expense paid in cash)
Here, Cash still decreases, but Electricity Expense reduces the period’s profit. The amount and cash movement are identical; the affected account is different because the economic purpose is different.
Four Questions Before Choosing the Account
- What happened? Cash left the business.
- Which aspect was affected? The purpose of withdrawal and the Cash asset.
- What changed? For personal use, Drawings increased and Cash decreased. For office electricity, Expense increased and Cash decreased.
- Which accounts record it? Drawings and Cash—or Electricity Expense and Cash.
Important Accuracy Checks
- Outstanding expense already recorded: If the ₹5,000 electricity expense was accrued earlier and is now merely paid, debit Electricity Payable/Outstanding Electricity—not Electricity Expense again.
- Company versus proprietor: “Drawings” is commonly used for sole proprietors and partners. A company shareholder taking money requires its actual legal/accounting nature—such as authorised salary, dividend, reimbursement or loan—and should not automatically be posted as Drawings.
- Trial Balance limitation: A wrong debit to Expense instead of Drawings can still leave total debits equal to total credits. Agreement of the Trial Balance does not prove correct classification.
Worked Capital Effect
Opening Capital is ₹1,00,000. The business earns ₹20,000 profit, and the proprietor withdraws ₹5,000 for personal use. Ignoring any further capital introduced, closing capital is:
₹1,00,000 + ₹20,000 − ₹5,000 = ₹1,15,000.
The ₹5,000 Drawings did not change the ₹20,000 profit; it reduced closing capital.
Self-Check Practice
1. Owner takes goods costing ₹2,000 for home use. Answer: Drawings A/c Dr. ₹2,000; To Purchases/Inventory A/c ₹2,000, depending on the accounting system and facts.
2. Business pays ₹3,000 office rent in cash for the current month. Answer: Rent Expense A/c Dr. ₹3,000; To Cash A/c ₹3,000.
3. Owner deposits ₹10,000 personal money into the business. Answer: Cash/Bank A/c Dr. ₹10,000; To Capital A/c ₹10,000. It is capital introduced, not sales income.
Continue the Learning Path
Begin with Why Businesses Need Accounting, compare Owner Capital vs Income, then study Debit and Credit Explained and Journal Entries Step by Step. Browse all verified videos in the Accounting Video Lessons Hub.
Educational content by Ejaj Abubakar Rangunwala — Rangunwala’s Academy.