Drawings in Accounting: Definition, Process & Importance

There is a record that is kept by a business owner or accountant. It details how much cash has been taken out by business owners. This record is referred to as drawing in accounts. 

Although they are handled significantly differently than employee wages, these withdrawals are undertaken for personal purposes. This is rather for business purposes. These withdrawals must be compared to the owner’s equity, thus it’s crucial to keep proper records of them. 

You need to know how to shut your drawings account at the conclusion of each fiscal year. So keeping track of these transactions and balancing the books is made simpler by having a distinct drawing account.

Read on as we take a closer look at drawings in accounting.

Table of Contents

What Are Drawings in Accounting?

How Does a Drawing Account Work?

Drawing Account Importance

How Drawings Affect Financial Statements

How to Record Drawings in Accounting

Key Takeaways

FAQs on Drawing Account

What Are Drawings in Accounting?

A drawing account is a record in accounting kept to monitor cash and other such assets taken out of a company by their owners. Drawing accounts are frequently used by companies that undergo taxation under the assumption of being partnerships or sole proprietorships. It is frequently necessary to record owner withdrawals that come from corporations that are subject to separate taxation as dividends or compensation.

Similar in function to a pay, a drawing is given to sole proprietors or partners. Any money taken from the business account for personal use is referred to in accounting terminology as a drawing. This can be as substantial as a paycheck or as straightforward as lunch that is paid for with your employer’s credit card.

Drawings, however, do not just apply to cash withdrawals. It can also refer to products and services that the proprietor has taken away from the business for personal use. This can entail purchasing corporate property or using resources from the job site, for instance.

How Does a Drawing Account Work?

In an unincorporated firm, the draw of an owner will happen at the point the owner takes something from the company for personal use, such as money. This is typically in firms that include a partnership, sole proprietorship, or limited liability corporation (LLC). 

Owners of these types of businesses are able to withdraw funds from their corporate bank accounts. They can then transfer them to a separate personal account as needed. This is to cover personal costs, providing they comply with the law.

An opposing account to the owner’s equity is a drawing account. Because owner withdrawals imply a reduction of the owner’s equity in a business, the debit balance of the drawing account is in contrast to the anticipated credit amount of an equity account of an owner.

Every journal entry needs both a debit and a credit in accordance with double-entry bookkeeping. A debit to the drawing account must be countered by a credit to the cash account in the same amount because a cash withdrawal necessitates a credit to the cash account.

The drawing account has to be closed out with a credit at the year-end. This is because it records distributions to owners in a given year. This is the overall amount withdrawn. The remaining sum is subsequently debited and transferred to the principal owner’s equity account. Afterward, the drawing account is reopened and utilised for tracking payouts once more the year after.

Drawing Account Importance

Because they keep track of business withdrawals over the course of a year, drawing accounts are crucial. This may be crucial for both basic accounting and tax considerations. 

Drawing best practices can help increase total revenue and potentially the profitability of the business because they reduce the owner’s business equity at the end of the year. It’s crucial to keep track of these disbursements when balancing corporate accounts because it’s useful for tracking taxes and an organization’s financial health.

How Drawings Affect Financial Statements

In accounting, withdrawals made by the owner are referred to as drawings. As a result, the financial statement of the company will be impacted by a fall in assets equal to the amount withdrawn. As the owner is basically cashing in on a small portion of their claim to the company, it will also result in a diminution in the owner’s equity.

Drawings are a sort of financial activity, thus the company’s accounting departments must appropriately record them. As a result, they will appear on a statement of cash flows.

How to Record Drawings in Accounting

A debit from the drawing account as well as a credit from the cash account make up a journal entry for the drawing account. A journal entry that closes an individual sole proprietorship’s drawing account includes both a debit and a credit. The debit is to the owner’s capital account. While the credit is made to the drawing account.

An owner withdrawal would normally be noted as a debit on your balance sheet. If the withdrawal is performed in cash, the exact amount withdrawn can be easily quantified. The amount noted would normally be a cost value if the withdrawal involved commodities or something comparable.

Drawing accounts are transient records that must be balanced at the conclusion of a fiscal year or other period. This can be resolved in a number of ways, such as the owner repaying the loan or having their wage reduced to reflect the amount withdrawn.

The balance sheet, commonly referred to as a statement of financial status, is a crucial record. It is used for determining and presenting your company’s financial position. A basic balance sheet lists the assets, liabilities, and stockholder equity of your company. 

Drawings are therefore recorded in the balance sheet according to their category.

Key Takeaways

A drawing account is a ledger that documents the money and other assets that have been taken out of a company by its owner. An entry that debits the drawing account will have an equal and opposite credit to the cash account. A drawing account serves as a contra account to the equity of the business owner.

Each year, an account is closed out, its amount moved to the equity account of the owner, and then it is reopened the following year.

Before taking money or other assets out of their company, small business owners should be aware of the regulations. Owner draws are beneficial and can be used as a means of self-employment by business owners. 

However, it’s crucial to keep in mind that they are not regarded as business expenses. They must still be properly reported, and, if taken in excess, could financially harm the company.

FAQs on Drawing Account

Are Drawings an Asset or Expense?

Drawings are not the same as expenses or wages, which are charges to the firm. Drawings are recorded as a reduction in the owner’s equity as well as in the assets.

What Is the Accounting Entry for Drawings?

A debit to the drawing account and a credit to the cash account constitute the standard accounting entry for the drawing account.

What Is the Difference Between Drawing and Withdrawal?

Typically, the relevant General Ledger account is referred to as drawings. On the other hand, the word “withdraw” is used as a verb.

How Do You Calculate Drawings?

You can calculate interest on drawings with the following formula:

Interest on drawings = (Total of Products × Rate) / 100 × 1/12

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