Drawing Account
What Is a Drawing Account?
A drawing account is an accounting record kept up with to follow money removed from a business by its owners. A drawing account is utilized principally for businesses that are taxed as sole proprietorships or partnerships. Owner withdrawals from businesses that are taxed as separate substances must generally be accounted for as one or the other compensation or dividends.
How a Drawing Account Works
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 since owner withdrawals address a reduction of the owner's equity in a business. In keeping with [double-entry](/twofold entry) bookkeeping, every journal entry requires both a debit and a credit. Since 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 a similar amount.
Since the drawing account tracks distributions to owners in a given year, it must be closed out toward the end of the year with a credit (addressing the total removed) and the balance is moved to the really owner's equity account with a debit. The drawing account is then re-opened and involved again the next year for tracking distributions. Since taxes on withdrawals are paid by the individual partners, there is no tax impact to the business associated with the removed funds.
Significant
Since the drawing account isn't an expense, it doesn't appear on the income statement of the business.
Making a schedule from the drawing account shows the subtleties for and a summary of distributions made to every business partner. The fitting last distributions might be made at year-end, guaranteeing each partner gets the right share of the organization's earnings, as indicated by the partnership agreement.
Recording Transactions in the Drawing Account
A journal entry to the drawing account comprises 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 incorporates a debit to the owner's capital account and a credit to the drawing account.
For instance, toward the end of an accounting year, Eve Smith's drawing account has accumulated a debit balance of $24,000. Eve pulled out $2,000 each month for personal use, recording every 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.
Features
- 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 a similar amount.
- A drawing account is a ledger that tracks money removed from a business, typically a sole proprietorship or partnership, by its owner(s).
- Drawing accounts work year-to-year: An account is closed out toward the end of every year, with the balance moved to the owner's equity account, and afterward restored in the new year.
