Differentiate between drawings and capital. Give an example of atransaction for each of the item

Drawings and capital are two distinct concepts in accounting that relate to the treatment of funds within a business. Here is a step-by-step breakdown of the differentiation between drawings and capital, along with an example transaction for each:

1. Drawings:
   • Drawings refer to the withdrawal of funds or assets from a business by the owner(s) for personal use.
   • Drawings are considered as a reduction in the owner's equity in the business.
   • Drawings are not considered as an expense for the business.
   • Drawings are typically recorded in a separate account called "Drawings" or "Owner's Withdrawals."

Example transaction for drawings: Let's say the owner of a business withdraws $500 cash from the business for personal use. The journal entry to record this transaction would be: Debit: Drawings (or Owner's Withdrawals)$500 Credit: Cash $500

2. Capital:
   • Capital refers to the initial investment made by the owner(s) into the business, as well as any subsequent investments made.
   • Capital represents the owner's equity in the business and is considered as a liability for the business.
   • Capital is not affected by the withdrawal of funds for personal use (drawings).
   • Capital is typically recorded in a separate account called "Capital" or "Owner's Equity."

Example transaction for capital: Let's say the owner invests $10,000 cash into the business as initial capital. The journal entry to record this transaction would be: Debit: Cash$10,000 Credit: Capital $10,000

In summary, drawings represent the withdrawal of funds or assets by the owner(s) for personal use, while capital represents the owner's equity in the business. Drawings reduce the owner's equity, while capital represents the initial investment and subsequent contributions made by the owner(s) into the business.