Multiple Choice
Which type of accounting primarily deals with institutions that receive, transfer, and lend money to individuals, businesses, and government entities?
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1. Introduction to Accounting
Types of Accounting
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Which of the following statements about the drawing account is correct?
A
The drawing account is used to record business revenues.
B
The drawing account increases owner's equity.
C
The drawing account is a temporary account and is closed at the end of the accounting period.
D
The drawing account is a permanent account and appears on the balance sheet.
Verified step by step guidance1
Understand the purpose of the drawing account: The drawing account is used to record withdrawals made by the owner for personal use. It is not used to record business revenues or expenses.
Clarify the impact on owner's equity: Withdrawals recorded in the drawing account reduce owner's equity, as they represent assets taken out of the business for personal use.
Determine the account type: The drawing account is a temporary account, meaning it is closed at the end of the accounting period to the owner's capital account. This ensures that the owner's equity reflects the net effect of all transactions for the period.
Verify its appearance on financial statements: Since the drawing account is temporary, it does not appear on the balance sheet. Instead, its balance is transferred to the owner's capital account during the closing process.
Conclude the correct statement: Based on the above clarifications, the correct statement is: 'The drawing account is a temporary account and is closed at the end of the accounting period.'
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