What Is a Drawing Account?
A drawing account is an accounting record maintained to track money and other assets withdrawn from a business by its owners. A drawing account is used primarily for businesses that are taxed as sole proprietorships or partnerships. Owner withdrawals from businesses that are taxed as separate entities must be accounted for generally as either compensation or dividends.
Key Takeaways
- A drawing account is a ledger that tracks money and other assets withdrawn from a business, usually a sole proprietorship or a partnership, by its owner(s).
- A drawing account acts as a contra account to the business owner’s equity; an entry that debits the drawing account will have an offsetting credit to the cash account in the same amount.
- Drawing accounts work year to year: An account is closed out at the end of each year, with the balance transferred to the owner’s equity account, and then re-established in the new year.
How a Drawing Account Works
An owner’s draw occurs when the owner of an unincorporated business such as a sole proprietorship, partnership, or limited liability company (LLC) takes an asset such as money from their business for their own personal use.
Owners of such businesses are free to take money from their business bank accounts and deposit it in their personal accounts to pay personal expenses as and when they choose—provided, of course, that they play by the rules.
A drawing account covers all assets, not just cash. For example, this means that equipment withdrawn from the business for the owner’s personal use would also count as a drawing.
A drawing account is a contra account to the owner’s equity. The drawing account’s debit balance is contrary to the expected credit balance of an owner’s equity account because owner withdrawals represent a reduction of the owner’s equity in a business.
In keeping with double-entry bookkeeping, every journal entry requires both a debit and a credit. Because a cash withdrawal requires a credit to the cash account, an entry that debits the drawing account will have an offsetting credit to the cash account for the same amount.
Since the drawing account tracks distributions to owners in a given year, it must be closed out at the end of the year with a credit (representing the total withdrawn), and the balance is transferred to the main owner’s equity account with a debit. The drawing account is then reopened and used again the following year for tracking distributions.
Creating a schedule from the drawing account shows the details for and summary of distributions made to each business partner. The appropriate final distributions may be made at year-end, ensuring that each partner receives the correct share of the company’s earnings, according to the partnership agreement.
Note
Because taxes on withdrawals are paid by the individual partners, there is no tax impact on the business associated with the withdrawn funds.
Recording Transactions in the Drawing Account
A journal entry to the drawing account consists of a debit to the drawing account and a credit to the cash account. A journal entry closing the drawing account of a sole proprietorship includes a debit to the owner’s capital account and a credit to the drawing account.
For example, at the end of an accounting year, Eve Smith’s drawing account has accumulated a debit balance of $24,000. Eve withdrew $2,000 per month for personal use, recording each transaction as a debit to her drawing account and a credit to her cash account.
The journal entry closing the drawing account requires a credit to Eve’s drawing account for $24,000 and a debit of $24,000 to her capital account.
What Is the Entry of a Drawing Account?
The accounting entry typically would be a debit to the drawing account and a credit to the cash account—or whatever asset is withdrawn.
Is a Drawing Account an Asset?
The drawing account represents a reduction of the business’s assets, as the assets in question are withdrawn and transferred to the owner for personal use.
Are Owner Draws an Expense?
No. Owner draws are for personal use and do not constitute a business expense. This means, among other things, that they are not tax deductible.
The Bottom Line
Small business owners should be aware of the rules before withdrawing cash or other assets from their business. Owner draws can be helpful and function as a method for a business owner to pay themselves.
However, it’s important to remember that they are not considered business expenses, must be recorded in the correct way, and can weaken the company financially if made excessively.
