The business entity concept says the business and its owner are separate. Only transactions that affect the business are recorded, and anything the owner takes out for personal use is drawings.
This lesson is part of SPM Accounting foundations. Goods taken by the owner are handled again in adjusting inventory and drawings.
How do you decide if it is a business transaction?
Ask who the item was for. If it served the business, it is recorded as a business asset, liability, income or expense. If it served the owner personally, it is drawings.
Drawings can be cash, goods, or a business bill paid for the owner’s home or family. They always reduce equity.
Worked example: three owner withdrawals
Hafiz has a bookshop with opening capital of RM20 000. During the year three items involve his personal use.
| Event | Business record | Amount (RM) |
|---|---|---|
| Takes cash from the till for family expenses | Drawings | 500 |
| Takes books for his children, bought by the shop for RM250 | Drawings (goods) | 250 |
| Pays his home electricity bill from the shop bank account | Drawings | 120 |
Total drawings are 500 + 250 + 120 = RM870. Equity is reduced by RM870, because the owner has taken part of his claim out of the business.
What goes wrong if they are mixed?
Suppose the home electricity bill of RM120 is recorded as a business expense. Profit is then RM120 lower than the shop’s real performance.
Correct treatment: debit Drawings RM120 and credit Bank RM120. Wrong treatment: debit Electricity expense and credit Bank. Both reduce cash equally, but only the wrong one changes profit.
The mistake that loses marks
The common slip is to treat drawings as an expense. Expenses are costs of running the business and appear in the income statement, while drawings are the owner’s withdrawals and appear in equity.
A second slip is to record money that the owner pays into the business from personal savings as income. It is capital, because the business did not earn it.
Check yourself
Nadia runs a flower stall. She (a) pays the stall’s RM300 rent, (b) takes RM200 cash for personal shopping, (c) pays her own RM90 mobile phone bill from the business account, and (d) puts RM1 000 of personal savings into the stall. Which items are drawings, and what is the total drawings?
Answer
(a) Business expense: rent for the stall.
(b) Drawings: cash for personal use.
(c) Drawings: a personal bill paid by the business.
(d) Additional capital: the owner’s money added to the business.
Total drawings = 200 + 90 = RM290. The equity effect of these items is +1 000 capital − 290 drawings − 300 rent.
What to study next
Test your classification with the foundations practice set. Then see how drawings appear in the year-end accounts through adjusting inventory and drawings.
For a teacher to drill mixed owner and business items with you, see online one-to-one Accounting tuition.