What is the purpose of the closing entry for drawings in a sole proprietorship?

• A. Transfer the owner's draws to the capital account to reflect the change in owner's equity.
• B. Record draws as an expense.
• C. Increase the owner's equity by the amount drawn.
• D. Decrease net income.

Answer: (A)

Drawings reduce the owner’s equity, not the business’s income. At period end, the amount withdrawn is closed into the Owner’s Capital account so the equity reflects these withdrawals and the Drawings balance resets to zero for the next period. The typical closing entry debits Owner’s Capital and credits Drawings, thereby decreasing equity by the amount drawn and clearing the Drawings account. This keeps the financial statements accurate: net income remains unchanged because drawings are distributions, not business expenses.