Drawing Account

Drawing Accounting Definition

Drawing Account is a contra owner’s equity account used to record the withdrawals of cash or other assets made by an owner from the enterprise for its personal use during a fiscal year. It is temporary in nature and it is closed by transferring the balance to an owner’s equity account at the end of the fiscal year.

The word drawings refer to a withdrawal of cash or other assets from the proprietorship/partnership business by the Owner/Promoter of the business/enterprise for its personal use. Any such withdrawals made by owner leads to a reduction in owner’s equity invested in the Enterprise. Therefore, it is crucial to record such withdrawals (made by the owner) over the year in the balance sheet of the enterpriseBalance Sheet Of The Enterprise A balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more as a reduction in owner’s equity and assets.

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Source: Drawing Account (wallstreetmojo.com)

Example

To understand the concept of the drawing account and its utility, let’s start with a practical example of a transaction in a sole proprietorship business. Assuming the owner (Mr. ABC) started the proprietorship business (XYZ Enterprises) with an investment/equity capital of $1000.

The Balance sheet of XYZ Enterprises as on 1^st April 2017 is as below:

Suppose Mr. ABC takes out $100 from the business for its personal use during the financial year FY18. The impact of the above transaction on the Balance sheet will be a reduction in the cash balance and in the owner’s equity capital by $100. Therefore, the Balance Sheet after the transaction will look like this:

The above demonstration is one example of a transaction; however, in proprietorship/partnership, the owners generally may do multiple transactions during a fiscal year for their personal use. There is a mechanism to record such transactions and adjust the Enterprise’s Balance Sheet for such transactions where the Owner uses business resources (cash or goods) for personal use.

Drawing Account Journal Entry

Extending our discussion from the initial section of the article where we have taken the example of Mr. ABC (Owner) making a withdrawal of $100 from its proprietorship business (XYZ Enterprises) for its personal use. This transaction will lead to a reduction in owners’ equity capital of the XYZ Enterprises and also a reduction in Cash Balance of the enterprise.

Since this account is set up as contra owner’s equity account to record this and similar other transactions of this nature, the following transactions will be recorded in the drawing account. Its Journal entry for the above cash transaction by owner will be recorded with a debitDebit Debit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more in owner’s and as a credit in the cash account. The entries for the above transactions will be as below:

Since it is a temporary accountTemporary Account Temporary accounts are nominal accounts that start with zero balance at the beginning of the financial year. The balance is visible in the income statement at the year-end and then transferred to the permanent as reserves and surplus.read more, it is closed at the end of the financial year. At the end of the financial year, the drawing account balanceAccount Balance Account Balance is the amount of money in a person's financial account, such as a savings or checking account, at any given time. Furthermore, it can refer to the total amount of money owed to a third party, such as a utility company, credit card company, mortgage banker, or other similar lender or creditor.read more will be transferred to the owner’s capital account, thereby reducing the owner’s equity account by $100.

Therefore, at the end of the Year owner’s equity balance will be as below:

Owner’s equity capital= (1000) +Drawing account balance = (1000) +(-100) =$900

Also, Cash account on the asset side of the balance sheet at the end of financial year FY18 will reduce by $100 and a closing balance will be as below:

Cash= (200-Cash withdrawals) = (200-100) =$100

Therefore, the balance sheet position of XYZ Enterprises at the end of the fiscal year FY18 to include the impact of an above-discussed transaction will be as below.

Summary of the Drawing Account Entry

Drawing Account is an account in the books of the business which is used to record the transactions involving the withdrawal of something by the owner of the business who has his capital invested in the business, generally proprietorship or partnership business.

Its a contra owner’s equity account to an associated owner’s equity account.
It is used to record the transaction of an owner withdrawing cash or other assets from its proprietorship enterprise for personal use.
It is temporary in nature, which is closed at the end of the fiscal year and starts with zero balance to record the owner’s withdrawals in the next fiscal year.
It is closed at the end of the fiscal year by transferring the balance from the drawing account to the owners’ equity capital account.
It’s useful in keeping track of distributions made to owners in a partnership business, thus helps in avoiding any dispute between partners in business.

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Drawing Account