What Is a Drawing Account?
A drawing account is an accounting record maintained to track money withdrawn from a business by its owners.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 generally be accounted for as either compensation or dividends.
The Basics of a Drawing Account
A drawing account is a capital account. However, because owner withdrawals reduce the account value, a debit balance is expected in a drawing account. Also, because each transaction involves a debit and a credit—and because a cash withdrawal requires a credit to the cash account—the drawing account needs a debit for the same amount. In contrast, the owner’s main capital account should have a credit balance.
Recording Transactions in a Drawing Account
The transaction typically found in a drawing account is a credit to the cash account and a debit to the drawing account. The drawing account represents a reduction of owners’ equity in the business. Since the drawing account tracks distributions to owners in a given year, the account is closed out with a credit and the balance is transferred to the owner’s equity account with a debit. The drawing account is then used again the following year for tracking distributions. Because taxes on withdrawals are paid by the individual partners, there is no tax impact associated with the withdrawn funds on the part of the business.
As a temporary owner equity account, a drawing account must be closed at the end of each accounting year.
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 each partner receives the correct share of the company’s earnings, according to the partnership agreement.
Closing a Drawing Account
Because the drawing account is a temporary owner equity account, it must be closed at the end of each accounting year. The account is also a contra account to the owner’s equity, so the drawing account’s debit balance is contrary to the expected balance of an owner equity account. In addition, the drawing account is closed directly to the capital account. The drawing account is not an expense and does not get closed on the income summary 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 Jones’s drawing account has 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.