If the owner of a business invests personal funds into the business, will it be a credit to his drawings?
For example,if the owner had drawings of $5000 and then he invested $2000 of his personal funds into the business, would the drawings account then be $3000?
Thanks.
No, when the owner of a business invests personal funds into the business, it does not impact the "Drawings" account. Instead, it affects the "Owner's Equity" or "Capital" account.
To understand why, let's break it down step by step:
1. Initially, the owner's "Drawings" account had a balance of $5000. This account is used to record the withdrawals that the owner makes from the business for personal use.
2. When the owner invests $2000 of personal funds into the business, it represents an increase in the owner's capital. The owner's investment should be recorded in the "Owner's Equity" or "Capital" account, not the "Drawings" account.
3. Therefore, the "Owner's Equity" or "Capital" account would increase by $2000 due to the owner's investment. The balance of this account would now be $2000.
4. However, the balance of the "Drawings" account remains unchanged at $5000 because it reflects the total amount the owner has withdrawn for personal use, not the owner's investments.
In summary, the drawings account does not change when the owner invests personal funds into the business. Instead, the owner's investments are recorded in the "Owner's Equity" or "Capital" account.