Withdrawals by the owner affect owner's equity how?

• A. Increase owner's equity
• B. Increase revenues
• C. Decrease liabilities
• D. Decrease owner's equity

Answer: (D)

Withdrawals by the owner are distributions of the business’s assets to the owner and are not business income or an expense. Because equity reflects the owner’s claim on the remaining assets after liabilities, taking assets out reduces that claim. So withdrawals decrease owner's equity. In accounting terms, withdrawals are tracked in a drawings (contra-equity) account, which lowers total equity. For example, if the owner takes 2,000, assets fall by 2,000 and so does owners' equity. This situation does not affect revenues or liabilities, which is why other choices don’t fit.