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SSC Financial and Cost Accounting P-1 QUESTION #9624
Question 1
Under the Separate Entity Concept, if the owner of a sole proprietorship withdraws Rs. 20,000 in cash for personal use, which of the following best describes the accounting treatment?
  • Debit: Capital Account; Credit: Cash Account, as the capital is directly reduced
  • Debit: Drawings Account; Credit: Cash Account, with drawings transferred to Capital at year-end✔️
  • Debit: Expenses Account; Credit: Cash Account, since drawings are a business expense
  • Debit: Drawings Account; Credit: Capital Account, with cash unaffected
Correct Answer Explanation
Under the Separate Entity Concept, the business is treated independently from its owner. Cash drawn by the proprietor is recorded as Drawings (Dr. Drawings / Cr. Cash) to keep the Capital Account clean. At year-end, the Drawings balance is transferred to the Capital Account, reducing it. Drawings are not a business expense.