How are owner withdrawals recorded in a sole proprietorship and how do they affect equity?

• A. Debited to Drawings/Owner's Drawings and credited to Cash; withdrawals reduce Owner's Equity.
• B. Credited to Drawings; debited to Cash; withdrawals increase Owner's Equity.
• C. Debited to Revenue; credited to Drawings; withdrawals increase Owner's Equity.
• D. Debited to Cash; credited to Investments; withdrawals have no effect on equity.

Answer: (A)

The main idea is that a withdrawal by the owner is a distribution of earnings that reduces the owner’s claim on the business, i.e., it lowers owner’s equity. In double-entry terms, you Debit Drawings (Owner’s Drawings) to reflect increasing this contra-equity balance, and you Credit Cash to show money leaving the business. Since Drawings reduces equity, this entry demonstrates the exact impact: assets decrease due to the cash outflow, and equity decreases because the owner is taking a portion of the business’s funds for personal use. Withdrawals aren’t expenses or revenues, so they don’t affect income; they directly reduce owner’s equity.