What is a draw account?
A draw account is an accounting register kept to track money withdrawn from a business by its owners. A draw account is used primarily for businesses that are taxed as sole proprietorships or partnerships. Withdrawals from business owners taxed as separate entities should generally be accounted for as compensation or dividends.
Key points to remember
- A draw account is a ledger that tracks money withdrawn from a business, usually a sole proprietorship or a partnership, by its owner (s).
- A drawing account acts as a counter-account of the equity of the business owner; an entry that debits the draw account will have an offset credit on the cash account of the same amount.
- The drawing accounts work from year to year: an account is closed at the end of each year, the balance is transferred to the owner’s equity account, then reinstated in the new year.
How a drawing account works
A drawing account is a counter-account of the owner’s equity. The debit balance in the drawdown account is contrary to the expected credit balance in the owner’s equity account, since the owner’s withdrawals represent a reduction in the equity of the business owner. According to double-entry accounting, each journal entry requires both debit and credit. Since a cash withdrawal requires a credit to the cash account, an entry that debits the draw account will have an offset credit to the cash account for the same amount.
Since the draw account follows distributions to owners in a given year, it must be closed at the end of the year with a credit (representing the total withdrawn) and the balance transferred to the capital account. the owner’s own with a debit. The draw account is then reopened and used again the following year to monitor distributions. Since the taxes on withdrawals are paid by the individual partners, there is no tax impact for the business associated with the funds withdrawn.
As the drawing account is not an expense, it does not appear in the company’s income statement.
Creating a program from the drawing account displays the details and a summary of the distributions made for each trading partner. Appropriate final distributions can be made at the end of the year, ensuring that each partner receives the correct share of business revenue, in accordance with the partnership agreement.
Recording of transactions in the drawing account
An entry in the draw journal consists of a debit to the draw account and a credit to the cash account. A journal entry closing the draw account of a sole proprietorship includes a debit to the owner’s capital account and a credit to the draw account.
For example, at the end of an accounting year, Eve Smith’s draw account accumulated a debit balance of $ 24,000. Eve withdrew $ 2,000 per month for personal use, recording each transaction as a debit to her draw account and a credit to her cash account. The journal entry closing the draw account requires a credit to Eve’s draw account of $ 24,000 and a debit of $ 24,000 to her capital account.