ICAEW AF · Chapter 7 · Question 11 of 12
A sole trader's personal home insurance of £1,500 was paid from the business bank account and debited to the business insurance expense account. What journal corrects this?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Debit Drawings £1,500, Credit Insurance expense £1,500
Explanation
Payments of the owner's private expenses are drawings, not business expenses. The bank entry was correct, but the debit was made to the wrong account. The insurance expense must be credited to remove the £1,500 and drawings debited, which will reduce the owner's capital rather than the business's profit.
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