Key Concepts
In an exam you may be given a finished Capital or Drawings account and asked to explain what the entries mean.
Every transaction is recorded in two accounts — that is double entry. To interpret an account, check two things for each entry: whether it is a debit or a credit in this account, and the Particulars column, which names the other account in the entry. Together they tell you what the entry was for.
Reading the Capital account (normally a credit balance):
| Entry side | What it usually means |
|---|---|
| Credit | Owner contributed an asset (Particulars names the asset, e.g. Cash at bank, Office equipment), or profit was transferred (Particulars: Income summary) |
| Debit | Owner's drawings were transferred in (Particulars: Drawings), or a loss was transferred (Particulars: Income summary) |
Reading the Drawings account (normally a debit balance while it holds drawings): each debit is an item the owner took out (Particulars names what was taken — Cash in hand, Inventory, etc.); the single credit at year-end (Particulars: Capital) is the transfer that closes it.
Read the Particulars — it names the other account. In a Capital account, a credit with "Income summary" = profit; a debit with "Income summary" = loss; a debit with "Drawings" = the year's drawings. In a Drawings account, each debit is something the owner took; the year-end credit to "Capital" just closes it off.
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X4 | ||||
| 1 Dec | Balance b/d | 800 Dr | ||
| 18 Dec | Cash in hand | 150 | 950 Dr | |
| 20 Dec | Inventory | 300 | 1,250 Dr | |
| 31 Dec | Capital | 1,250 | − |
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X4 | ||||
| 1 Dec | Balance b/d | 15,000 Cr | ||
| 10 Dec | Cash at bank | 1,500 | 16,500 Cr | |
| 22 Dec | Office equipment | 700 | 17,200 Cr | |
| 31 Dec | Income summary | 6,000 | 23,200 Cr | |
| 31 Dec | Drawings | 1,250 | 21,950 Cr |
(a) Calculate the total drawings for the year.
Total drawings = $800 + $150 + $300 = $1,250. The Balance b/d on 1 Dec is not a year-start figure — the financial year ends 31 December, so 1 Dec falls near the end of the year. The Drawings account did start at zero on 1 January; by 1 December it had already built up $800 of drawings, and the 18 and 20 December items are added on top.
(b) Interpret these entries:
- Drawings account, 20 Dec 20X4: Elaine took inventory costing $300 for her personal use.
- Capital account, 22 Dec 20X4: Elaine brought office equipment costing $700 into the business — a capital contribution.
- Capital account, 31 Dec 20X4: the business made a profit of $6,000 for the year (Income summary), and Elaine's total drawings of $1,250 were transferred out.
(c) Statement of Financial Position (equity extract).
Statement of Financial Position as at 31 December 20X4 (extract)
| $ | |
|---|---|
| Owner's equity | |
| Capital ($15,000 + $1,500 + $700 + $6,000 − $1,250) | 21,950 |
Reading a debit in the Capital account as a contribution. A debit to Capital reduces it — it is drawings or a loss, not a contribution. Contributions and profit are on the credit side.
Mistaking "Income summary" for cash. "Income summary" in the Capital account is the transfer of the year's profit or loss — not a cash movement.
Ignoring the opening balance when totalling drawings. The year's drawings include the opening Balance b/d plus the entries during the period, not just the latest few items.