Gemma and Audrey are in partnership. Their capital balances at the end of the accounting period are $200 000 and $150 000 respectively. Gemma decides to make a permanent cash withdrawal from her capital account of $75 000. Assuming the variable capital balances method (method 1) is used, the correct accounting entry to record this transaction is:
A) DR Gemma - Retained earnings account $75 000; CR Cash account $75 000
B) DR Gemma - Capital account $75 000; CR Cash account $75 000
C) DR Gemma - Capital account $75 000; CR Profit distribution account $75 000
D) DR Gemma - Retained earnings account $75 000; CR Profit distribution account $75 000

Question

Quizplus · Accepted Answer

Since Gemma is making a permanent cash withdrawal from her capital account, the entry should be a reduction in her capital account and an increase in the cash account. Therefore, option B is the correct entry as it debits Gemma's capital account and credits the cash account. Option A is incorrect as retained earnings account is used to record profits obtained by the company, not withdrawals. Option C is incorrect because there is no profit distribution. Option D is incorrect because it would mean that the $75,000 reduction in Gemma's capital account is considered a profit distribution, which is not the case.

Gemma and Audrey Are in Partnership