What is the purpose of a closing entry for drawings/draws 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)

Closing drawings transfers the owner’s withdrawals from the drawings account into the owner’s capital account, updating the owner’s equity to reflect what the owner has taken out of the business. Drawings reduce the owner’s claim on the business, so ending the period with a zero balance in drawings and a reduced capital balance shows the true ending equity. Drawings are not business expenses and do not affect net income, so they aren’t recorded as an expense or used to adjust income. By closing, you reset the drawings account for the next period and reveal the correct ending capital.