Solution 3.9 

Explain in your own words the relationship between ‘net profit’ and ‘capital’. 

If a business makes a profit then this profit belongs to the owner and, should the owner decide to keep the profit in the business, then profit increases capital (the amount the owner puts into the business). On the other hand, losses decrease capital. In general most business will retain a lot of profits in the business, as this is an important form of finance to enable the business to expand. 

What do you understand by the term ‘drawings’?

The term ‘drawings’ represents money or any other asset taken out of a business by the owner for his own use. For example, if the owner of the business withdrew cash or stock for his own use.  Drawings is the opposite to capital and, in the balance sheet, drawings is deducted from capital to show the net capital invested by the owner.