Why drawings reduce capital as well as liabilities of a business.

suppose shyam had started a business of furniture and he withdraw some chairs and tables from company for his personal use and it is said to be reduction in company's capital.Then further,why it is said that it is also a reduction in the liabilities of business?

asked Apr 20, 2015 in Accounting Equation by kajol kumari (22 points) 792 views

1 Answer

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When an owner withdraws money or goods from his business, it has two aspects:

1. It reduces assets of the business and

2. It also reduces the capital of the firm.

This keeps the Accounting Equation balanced, because from asset side furniture reduces in above case and on liabilities side Capital reduces.

Business has two two types of liabilities (a) External liabilities -  what business owes to outsiders, for example what business owes to its creditors, and (b) Internal Liabilities (Capital).  Obviously a reduction in capital is also a reduction in total liabilities of a business because total liabilities include both Internal as well as External Liabilities.

answered Apr 20, 2015 by jbsclasses (3,971 points)