Sole proprietors often invest funds in their businesses and sometimes they withdraw funds for personal use or for other investments. The drawing account is used to record cash withdrawals. It is a contra equity account that reduces the value of the owner's equity account on the balance sheet. It also is a temporary account that is closed at the end of an accounting period, which is usually a quarter or a year.
Record a cash withdrawal. Credit or decrease the cash account, and debit or increase the drawing account. The cash account is listed in the assets section of the balance sheet. For example, if you withdraw $5,000 from your sole proprietorship, credit cash and debit the drawing account by $5,000.
Add all the withdrawals for a period. Continuing with the example, if you have made two other withdrawals of $1,000 and $2,000, the total for the period is $8,000 ($5,000 + $2,000 + $1,000). Therefore, the drawing account should have a debit balance of $8,000.
Close the drawing account at the end of the period. Debit or decrease the owner's equity account, and credit or decrease the drawing account. Temporary accounts, such as drawing accounts, revenues and expenses, are closed or zeroed out at the end of each period. Permanent accounts, such as cash and liabilities, are not closed. To conclude the example, credit the drawing account and debit owner's equity by $8,000 each.
Tips & Warnings
- Companies with one or more classes of stock, such as common stock and preferred stock, use the terms "shareholders' equity" and "stockholders' equity" on the balance sheet. Founders and executives are paid salaries; they cannot withdraw funds from the company, and so there is no need for drawing accounts.
- Partnership accounting is similar to that for sole proprietorships. A statement of partners' capital has the same format as a statement of owner's equity, except that you need multiple columns for two or more partners. Each partner's drawing account is closed to the respective partner's capital account at the end of each period.
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