Which statement describes the effect of withdrawals on owner's equity?

Which statement describes the effect of withdrawals on owner's equity?

• A. Drawing increases owner's equity.
• B. Drawing has no effect on equity.
• C. Drawing increases revenues.
• D. Drawing reduces owner's equity.

Answer: (D)

Withdrawals reduce owner's equity because they are distributions of assets taken out of the business for the owner’s personal use. When the owner takes cash or other assets out, the assets drop and the owner’s claim on the business (owner’s equity) also drops by the same amount, keeping the accounting equation balanced (Assets = Liabilities + Owner's Equity). Drawings are not expenses or revenues; they do not affect the income statement. So the correct idea is that drawing reduces owner's equity.

Withdrawals reduce owner's equity because they are distributions of assets taken out of the business for the owner’s personal use. When the owner takes cash or other assets out, the assets drop and the owner’s claim on the business (owner’s equity) also drops by the same amount, keeping the accounting equation balanced (Assets = Liabilities + Owner's Equity). Drawings are not expenses or revenues; they do not affect the income statement. So the correct idea is that drawing reduces owner's equity.