What Is a Drawing Account?
Let me explain what a drawing account is—it's an accounting record I use to track money and other assets you withdraw from your business as an owner. You'll see this primarily in businesses taxed as sole proprietorships or partnerships. If your business is taxed as a separate entity, owner withdrawals are handled differently, usually as compensation or dividends.
Key Takeaways
You need to know that a drawing account is a ledger tracking money and assets withdrawn from a business, typically a sole proprietorship or partnership, by its owners. It functions as a contra account to the owner's equity, where a debit to the drawing account is offset by a credit to the cash account for the same amount. These accounts operate on a yearly basis: I close them out at year's end by transferring the balance to the owner's equity account, then re-establish them for the new year.
How a Drawing Account Works
An owner's draw happens when you, as the owner of an unincorporated business like a sole proprietorship, partnership, or LLC, take an asset such as money from your business for personal use. You're free to withdraw from your business bank account and deposit into your personal account for expenses whenever you want, as long as you follow the rules.
Remember, a drawing account covers all assets, not just cash—for instance, if you take equipment from the business for personal use, that counts as a drawing too. This account is a contra to your owner's equity; its debit balance opposes the usual credit balance of equity because withdrawals reduce your equity in the business.
In double-entry bookkeeping, every entry needs a debit and credit. When you withdraw cash, you debit the drawing account and credit the cash account for the same amount. At year's end, you close the drawing account with a credit for the total withdrawn, transferring the balance to the main owner's equity account with a debit. Then, you reopen it for the next year to track new distributions.
Creating a schedule from the drawing account gives you details and a summary of distributions to each partner. You can make final distributions at year-end to ensure each partner gets their correct share based on the partnership agreement. Note that taxes on these withdrawals are paid by individual partners, so there's no tax impact on the business from the withdrawn funds.
Recording Transactions in the Drawing Account
A journal entry for the drawing account involves a debit to the drawing account and a credit to the cash account. To close it for a sole proprietorship, you debit the owner's capital account and credit the drawing account.
For example, if at the end of the year your drawing account has a debit balance of $24,000 from monthly $2,000 withdrawals for personal use—each recorded as a debit to drawing and credit to cash—the closing entry would credit the drawing account for $24,000 and debit your capital account for the same.
What Is the Entry of a Drawing Account?
The typical accounting entry is a debit to the drawing account and a credit to the cash account or whatever asset you're withdrawing.
Is a Drawing Account an Asset?
No, the drawing account represents a reduction in the business's assets, as those assets are withdrawn and transferred to you for personal use.
Are Owner Draws an Expense?
No, owner draws are for personal use and aren't considered business expenses, meaning they're not tax deductible, among other implications.
The Bottom Line
As a small business owner, you should understand the rules before withdrawing cash or assets from your business. Owner draws can be useful for paying yourself, but remember they're not business expenses, must be recorded correctly, and excessive draws can weaken your company's finances.
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