Explanatory Question Example
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siphesihlegodz151Explanatory Question Example
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siphesihlegodz151Question:
A business owner asks you whether he should show his drawings on the Statement of
Profit or Loss or the Statement of Financial Position. Draft an email to the business owner
in a suitable format in response to his question.
Answer:
Dear [Business Owner’s Name],
I hope you are well.
Thank you for your query regarding where to reflect drawings in the financial statements.
Drawings represent the amount that an owner withdraws from the business for personal
use.
An expense is a cost incurred in the ordinary course of business operations to generate
revenue. Examples include rent, salaries, and utility bills.
Since expenses reduce profit, they are reported in the Statement of Profit or Loss.
Since drawings are not an expense incurred to generate income, they do not appear on
the Statement of Profit or Loss.
Instead, they are shown as a reduction in owner’s equity on the Statement of
Financial Position.
In a sole proprietorship, drawings are deducted from capital in the equity section of the
Statement of Financial Position. This is because withdrawals reduce the owner's interest
in the business rather than affecting its profit or loss.
If you need further clarification, please feel free to reach out.
Best regards,
Thought Process for Students:
1. Define an expense
o Explain that an expense is a cost incurred to generate income and appears
in the Statement of Profit or Loss.