(a) State three effects of drawings on the business of a sole proprietor. (b) Explain how the following items are treated in the balance sheet: i. accrued expenses ii. prepaid expenses iii. accrued income.
Explanation
(a) The effects of drawings on the business of a sole proprietor are: i. They decrease the stock of goods available ii. Lead to capital reduction. iii. Lead to a reduction in cash flows. iv. Reduce the profit of the business v. Reduce the fixed assets of the business vi. Slow down the growth of a business. vii. May lead to the collapse of the business. (b) Treatment in the Balance Sheet; i. Accrued expenses: These are treated as accruals under the current liabilities in the balance sheet. ii. Prepaid expenses: These are treated as current assets in the balance sheet. iii. Accrued income: This is treated as a current asset in the balance sheet.
