State BPA Fundamental Accounting Practice Exam

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Prepare for the State BPA Fundamental Accounting Exam with interactive flashcards and multiple choice questions. Each question comes with hints and explanations. Ace your exam with confidence!

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What is the effect of a credit on a drawing account?

It decreases the owner's equity
It increases the owner's equity
It has no effect
It transfers funds to a revenue account

The correct answer is: It decreases the owner's equity

When a credit is applied to a drawing account, it decreases the owner's equity. This is because a drawing account represents the withdrawals made by a business owner from the business for personal use. Withdrawals reduce the amount of capital that the owner has invested in the business. Therefore, when a credit is recorded in the drawing account, it signifies a reduction in that account's balance, leading to a corresponding decrease in overall owner's equity. In this context, drawing accounts serve to track the amounts taken out of the business by the owner, and since this effectively diminishes the equity that the owner has in the business, it directly impacts the overall financial position. As the business assets decrease due to the owner's withdrawals, this action reflects a reduction in net worth, confirming why a credit on a drawing account is associated with a decrease in owner's equity.