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A drawing account is an accounting record maintained to track money withdrawn from a business by its owners.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.
- A drawing account is a ledger that tracks money withdrawn from a business, usually a sole proprietorship or partnership, by its owner(s).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
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to owners in a given year, it must be closed out at the end of the year with a credit (representing the total withdrawn) and the balance is transferred to the main owner’s equity account with a debit.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 re-opened and used again the following year for tracking distributions. Because taxes on withdrawals are paid by the individual partners, there is no tax impact to the business associated with the withdrawn funds.
Since the drawing account is not an expense, it does not show up on the income statement of the business.
Creating a schedule from the drawing account shows the details for and a 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.
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.