Answer to Question #196600 in Management for Key

Question

the owner of the business is questioning why the gasoline and oil consumed by the family is going to come diane by his family which was paid from cash at the business charge to his personal growing he is claiming that since he is the owner of the business you has the description to the use of business cash how would you explain your accounting for such payment.

Answer 1

The gasoline and oil consumed by the owner's family is part of the drawings; hence, the business owner is accountable for the personal use of the commodities. However, the payment made from the business cash is part of the owner's equity, thus reduces his equity and capital funds of the business. Nevertheless, for the continuous growth of the business, the owner should use his cash in paying for the oil and gasoline consumed by his family. The business cash should be used for payments related to the business transactions only and not for personal use (Giner & Arce, 2012). Therefore, since drawings reduce the business owner's profits, the owner should purchase the oil and gasoline from the outside vendors for his growth.

           The withdrawals of business assets by the business owner for personal use reduces the owner's capital and business cash. The cash reduction is attributed to family consumption of the gasoline and oil sold by the business owner. Consequently, there will be a reduction in the volume of gasoline and oil in the business due to increased drawings for the owner’s family use. To increase the business sales turnover, the business owner should use the business cash to purchase gasoline and oil and not in payment of his withdrawals (Eitel-Porter, 2019). Payment for such transactions affects the general business cash flow and financial statements.

           In a nutshell, business owners should not take a whole sum of their business cash needed to cater to business bills and the payment of employees in the business. Owners must make their prompt budget for a particular period and ensure they have enough for their business obligations. According to Karadag (2017), the business owners who make continuous withdrawals from their profits have the discretion of making business payments from the business cash inflows. The payment should also be made from the business bank accounts and not directly from their realized profits.

 

References

Eitel-Porter, R. (2019). Drawings for the Woodcut Illustrations to Alessandro Vellutello's 1544 Commentary on Dante's Comedia. Print Quarterly, XXXVI, 3-17.

Giner, B., & Arce, M. (2012). Lobbying on accounting standards: Evidence from IFRS 2 on share-based payments. European Accounting Review, 21(4), 655-691.

Karadag, H. (2017). The impact of industry, firm age and education level on financial management performance in small and medium-sized enterprises (SMEs). Journal of Entrepreneurship in emerging economies.