So, you have set up your self-employed or partnership, run it successfully for a while and now want to start taking some money out of the business. The way to do it is by taking drawings from the business for personal use.
In this article, we will look at drawings in accounting, show examples and how it works in financial statements.
Drawings in accounting are when money is taken out of the business for personal use. The money taken out of the business needs recording on the general ledger and appears on the balance sheet. They do not affect the business expenses on the profit and loss account (income statement).
Drawings can also be called personal withdrawals, owner’s draws, or draws. They are recorded in a drawing account within the double-entry bookkeeping system of accounting.
Recording the drawings in a separate account makes it easier to track how much has been taken out and how much equity remains in the business.
You will need a separate drawing account for each person making it easier to track money withdrawn.
What Does Drawing Meaning in Accounting?
As a sole trader or partnership, you draw cash from the business and pay tax based on the profit and loss account.
As the business owner, it is your responsibility to ensure that the accounts are correct and pay the due self-assessment tax. You can hire a bookkeeper or accountant to prepare the accounts and submit the returns for you.
What is an Owner’s Equity Account?
To understand how much equity is in the business you need to look at the balance sheet and the accounting equation.
As small business owners, you might have started by investing money into the business; this is part of the equity. The figure will also increase or decrease if the business makes a profit or loss.
An example of the equity in the balance sheet is shown below:
The above example shows the following: The current year earnings of £13608.92, total drawings from the account, including previous years £15575.00, Retained earnings from previous years £7561.00, leaving the total equity of £5594.92.
What are the Drawings on the balance sheet?
The balance sheet is one of the main financial statements and shows a snapshot of the business on any date.
The drawings accounts are listed after the equity, and each owner will have their own account set up. If you are a sole proprietorship, you will only require one account, but a business partnership will require drawing accounts for each partner.
Are Drawings a Debit or a Credit?
The typical accounting entry for the drawings account is a debit to the drawing account and a credit to the cash account, bank account or asset. This creates a double entry in the accounts.
If you are using accounting software with bank feeds, once the transaction is reconciled, the double entry is completed for you.
Drawings for Sole Traders
You may take drawings as a sole trader. Drawings are drawing the money to pay yourself. As the income is generated by you (rather than through a separate legal entity, as with a limited company), you have greater freedom and flexibility in how you use that money.
Drawings are part of self-employed bookkeeping.
Drawings for Partnerships
As a partnership, you will have an agreement in place stating the rate at which you share the profits.
Although you do not have to take out drawings during the year, you will have to pay tax on the percentage of profits.
It is important to manage drawings correctly to ensure that the profits are split as per the partnership contract.
Example of a Drawing Account
Below is an example of a drawing account for a sole trader, for a partnership each partner would have an account.
Wrapping Up Drawings in Accounting
Drawings in accounting is when money is taken out of the business for personal use for a sole trader or partnership withdrawal of owner’s equity and appear on the balance sheet.
They do not affect the business expenses on the profit and loss account (income statement).
Drawings create a double entry in the accounts and typically occur as a withdrawal from cash, bank or asset. They appear as a debit to drawing account and credit to cash, bank or asset.
Angela Boxwell - Senior Writer
Business Accounting Basics, founded by Angela Boxwell, is a website dedicated to teaching businesses how to properly keep track of their finances. Since obtaining her A-Level in accounting and becoming qualified with the Association of Accounting Technicians, she has focused on running her bookkeeping business while also assisting small companies with their accounts.
Angela has over 30 years of accounting and bookkeeping experience, including working as an accounts assistant and running her own company.