A proprietor makes a cash withdrawal from the proprietorship. How does this affect the accounting equation? (Points : 1)
This has no effect on assets, liabilities, or owner’s equity.
Assets decrease; owner’s equity decreases.
Assets increase; liabilities decrease.
Assets decrease; owner’s equity increases
This has no effect on assets, liabilities, or owner’s equity.
The correct answer is: Assets decrease; owner’s equity decreases.
When a proprietor makes a cash withdrawal from the proprietorship, it reduces the cash assets of the business. As a result, the total assets of the business will decrease. Additionally, since the owner is taking cash out of the business, their equity in the business will also decrease. Therefore, both assets and owner's equity will be reduced.
When a proprietor makes a cash withdrawal from the proprietorship, it affects the accounting equation in the following way:
The accounting equation is: Assets = Liabilities + Owner's Equity.
In this scenario, a cash withdrawal would decrease the assets of the proprietorship because cash is being taken out. At the same time, it also decreases the owner's equity because the owner is taking away funds that they own.
Therefore, the correct answer is: Assets decrease; owner’s equity decreases.