Difference between drawing and capital

This query is : Resolved

Daya (Querist)
Follow

09 October 2022 what is difference between drawing and capital ,
while making journal entry in the case of proprietorship firm, HUF and partnership firm.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
Follow

12 October 2022 The term capital refers to the total amount of money invested in a commercial entity by its owners and promoters for the purposes of establishing and running a business. However, practically speaking, capital is a broader term that may include anything invested into a business. Owners can bring capital to their business in the form of cash or non-cash assets in any shape such as plant and machinery, intellectual properties, tangible properties like land and building etc.

Once brought to the business, the amount of capital is invested in different assets and processes for running day-to-day operations.
If an individual wants to set up a sole proprietorship, he will be solely responsible to manage the whole amount of capital to finance his business. If two or more persons choose to establish a partnership firm, they will all be collectively responsible to contribute towards their firm’s capital.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
Follow

12 October 2022 Contrary to the concept of capital, drawings represent the money withdrawn from a business. Simply put, an owner may withdraw some cash or assets from his business for his personal use, whenever needs. These are not to be confused with expenses, salaries, or wages which are the day-to-day costs incurred for running a business. Drawings are, in fact, shown as a reduction in assets and capital.

Capital refers to the money or assets invested into a business by its owners.
On contrary, drawings refer to the money withdrawn from a business by its owners for their personal use. Drawings can be made in the form of cash or assets or goods produced by an entity.

When capital is brought into the business, cash or a non-cash asset account is debited and capital account is credited.
When cash or some other asset like merchandise are withdrawn from the business, drawings account is debited and cash or a non-cash asset account is credited.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now