What is a drawing account?
A drawing account is an accounting record used by unincorporated businesses (sole proprietorships, partnerships, and many single‑member LLCs) to track assets—cash or noncash—that owners withdraw from the business for personal use. It’s a contra‑equity account (normal debit balance) that reduces owner’s equity, and it is closed to the owner’s capital/equity account at the end of the accounting period.
Key takeaways
– A drawing account records owner withdrawals (cash or assets) for personal use.
– It’s a contra‑equity account (debit balance) that reduces owner’s capital.
– Draws are not business expenses and generally are not tax‑deductible to the business.
– Businesses taxed as separate entities (C corps) treat owner withdrawals as wages or dividends, not draws.
– The drawing account is closed to owner’s equity at year end.
How a drawing account works (conceptual)
– Owner takes cash or other assets from the business → business assets decrease.
– In double‑entry bookkeeping you record: debit Drawing (increases the contra‑equity) and credit Cash (or other asset account).
– Throughout the year the drawing account accumulates the owner’s withdrawals. At period end it is zeroed out (closed) and the total is transferred to the owner’s capital/equity account.
Is a drawing account an asset?
No. The drawing account itself is not an asset. It’s a contra‑equity account that records reductions in owner’s equity. The actual assets withdrawn (cash, equipment, inventory) are assets that leave the business.
Are owner draws an expense?
No. Owner draws are distributions of equity for personal use and are not business expenses. They do not reduce taxable income for the business. Taxes on business earnings are generally paid by the individual owner(s), depending on the entity type and tax rules.
Journal entries — practical examples
1) Cash withdrawal (owner takes $1,500 cash):
– Debit: Owner’s Drawing $1,500
– Credit: Cash (Bank) $1,500
2) Noncash withdrawal (owner takes equipment with book value $4,000):
– Debit: Owner’s Drawing $4,000
– Credit: Equipment (or Accumulated Depreciation / Equipment depending on how you remove it from books) $4,000
(If you remove equipment with a gain or loss, record the gain/loss appropriately before crediting the asset.)
3) Closing the drawing account at year end (assume total drawings = $24,000):
– Debit: Owner’s Capital (or Partner’s Capital) $24,000
– Credit: Owner’s Drawing $24,000
This moves the drawing balance into the permanent equity account and reopens the drawing account for the new year.
How to record transactions in practice (step‑by‑step)
1. Establish an owner drawing account in your chart of accounts (contra‑equity).
2. Whenever an owner withdraws business funds or assets, immediately record a journal entry: debit Drawing; credit the relevant asset account (cash, inventory, equipment).
3. Keep receipts and documentation for each withdrawal (date, amount, purpose, owner). For noncash items include description and valuation method.
4. Periodically (monthly/quarterly) reconcile the drawing account to bank statements and to physical asset records.
5. At year end, prepare a schedule of all owner withdrawals for each owner/partner; use it to make any final distributions as required by partnership agreements.
6. Close the drawing account to owner’s capital after preparing financial statements.
Practical steps & best practices for small business owners
– Maintain separate bank accounts: keep personal and business funds separate to avoid commingling and simplify bookkeeping.
– Create an owner compensation policy: decide if you’ll use draws, fixed owner’s salary, guaranteed payments (partners), or a mix—document it.
– Use accounting software: record draws as soon as they occur and run owner/partner distribution reports.
– Record noncash withdrawals carefully: assign a reasonable book value and document the transfer.
– Reconcile regularly: frequent reconciliation prevents errors and identifies excessive withdrawals early.
– Plan cash flow: large or irregular draws can weaken the business—build a plan so working capital needs are not compromised.
– Consult a tax advisor: entity type affects tax treatment (e.g., sole proprietorships and partnerships vs. S or C corporations) and your personal tax obligations.
Tax considerations (high level)
– Sole proprietors and partners generally pay tax on business net income on their personal returns, regardless of how much they withdraw. Draws themselves are not taxable deductions for the business and are not separately taxed at the business level.
– For partners, guaranteed payments have special tax treatment and are recorded as business expenses. Consult Publication 541 (IRS) for partnership specifics.
– For corporations, owners who take money are typically paid as wages (subject to payroll tax) or as dividends—treatment differs from owner draws. See IRS Publication 334 (Tax Guide for Small Business) for general guidance.
– Keep good records to support the timing and nature of draws for tax and audit purposes.
Example (simple)
– Owner withdraws $2,000 monthly for personal living expenses. Each month record:
– Debit Drawing $2,000 / Credit Cash $2,000.
– After 12 months the drawing account has a $24,000 debit balance. At year end:
– Debit Owner’s Capital $24,000 / Credit Drawing $24,000.
This summarizes the year’s distributions and reduces the drawing account to zero for the new year.
When different entity types behave differently
– Sole proprietorships & partnerships: typically use drawing accounts. Owner(s) pay tax on business income on their personal returns.
– LLCs: treatment depends on tax election (disregarded entity, partnership, or corporation). Single‑member LLCs taxed as sole proprietorships typically use draws.
– S & C corporations: owners are generally employees or shareholders; withdrawals should be recorded as wages, dividends, or loans—consult a tax professional to avoid payroll/tax problems.
Common mistakes to avoid
– Treating draws as business expenses (they are not).
– Commingling personal and business funds.
– Failing to document noncash withdrawals and their valuation.
– Not reconciling drawing balances regularly.
– Not following entity‑specific rules for owner compensation.
The bottom line
A drawing account is a bookkeeping tool to track owner withdrawals that reduce owner equity. Proper recording and year‑end closing are important for accurate financial statements, tax reporting, and cash‑flow management. Use clear policies, maintain separate accounts, keep documentation, reconcile regularly, and get professional advice when entity structure or tax issues are unclear.
Sources and further reading
– Investopedia, “Drawing Account” (summary content and definitions): https://www.investopedia.com/terms/d/drawing-account.asp
– Internal Revenue Service, Publication 334, Tax Guide for Small Business: https://www.irs.gov/publications/p334
– Internal Revenue Service, Publication 541, Partnerships: https://www.irs.gov/publications/p541
If you’d like, I can:
– Provide a downloadable sample journal‑entry worksheet or spreadsheet for tracking draws, or
– Create sample entries for common scenarios in your business (monthly draw plan, partner profit distribution, noncash transfer). Which would help you most?