A sole proprietorship or partnership typically has owner draw accounts as part of its general ledger. These accounts hold any information related to transactions involving the removal of cash by an owner. Owners can remove cash to pay for personal items. The purpose of accounting for a proprietorship and partnership is to keep personal transactions separate from business transactions. Therefore, properly reporting owner withdrawals on cash flow is necessary for proper accounting procedures. Reporting owner withdrawals are typically a monthly process.
Document owner withdrawals as they occur using standard journal entries. Posting an entry debits an owner’s withdrawal account and credits the company’s cash account.
Review the general ledger at month's end. Identify all owner withdrawal transactions.
Prepare a standard indirect cash flow statement. List net income first; this amount is on the income statement.
Add back all noncash expenses to net income. These expenses typically include depreciation and amortization.
Deduct owner withdrawals from the net income figure on the indirect cash flow statement.
Report the net figure at the bottom of the statement as cash gained or lost for the current period.