If Aaron the Architect operates as a sole proprietor and he withdraws cash from his business to pay himself, how does this affect the balance sheet?
Explanation
Answer - A - A withdrawal of cash by the owner of sole proprietorship will result in a decrease to assets and a decrease to owner’s equity.
Key Takeaway: Cash is an asset. If taken out of the business, it is decreasing an asset. A withdrawal will decrease the owner’s equity account. Remember the accounting equation for this type of questions: Assets = Liabilities + owner’s equity.
Consider the effect of the transaction on the balance of the equation. Another trick is to remember that when creating a journal entry for this transaction, the credits and debits must equal, so if you remember that cash has a debit balance and decreases with a credit and owner’s equity has a credit balance and decreases with a debit, you will see debits = credits. When in doubt, try drawing T-Accounts to help visualize the transaction.
