(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 e...

Answer Details

(a) Three effects of drawings on the business of a sole proprietor are:

1. Reduced business equity: Drawings are withdrawals made by the owner from the business profits, which decreases the owner's equity in the business.
2. Affects financial statements: Drawings affect the profit and loss statement by reducing the net income and the balance sheet by reducing the owner's equity.
3. Tax implications: Drawings by the owner are not tax-deductible expenses, and the owner may have to pay personal income tax on the drawings taken from the business.

(b) The treatment of the following items in the balance sheet are:

1. Accrued expenses: These are expenses that the business has incurred but not yet paid for. They are shown as liabilities in the balance sheet and are recorded as an expense in the profit and loss statement. For example, if a business has received goods or services but not yet paid for them, they will be recorded as accrued expenses.
2. Prepaid expenses: These are expenses that the business has paid for in advance but have not yet been used up. They are shown as assets in the balance sheet and are recorded as expenses in the profit and loss statement as they are used up over time. For example, if a business has paid rent in advance for the next six months, it will be recorded as prepaid expenses.
3. Accrued income: This is income that the business has earned but has not yet received payment for. It is shown as an asset in the balance sheet and is recorded as revenue in the profit and loss statement. For example, if a business has provided services but not yet received payment, it will be recorded as accrued income.