how a drawing account works
an owner s draw occurs when the owner of an unincorporated business such as a sole proprietorship partnership or limited liability company llc takes an asset such as money from their business for their own personal use owners of such businesses are free to take money from their business bank accounts and deposit it in their personal accounts to pay personal expenses as and when they choose provided of course that they play by the rules a drawing account covers all assets not just cash for example this means that equipment withdrawn from the business for the owner s personal use would also count as a drawing 1a drawing account is a contra account to the owner s equity the drawing account s debit balance is contrary to the expected credit balance of an owner s equity account because owner withdrawals represent a reduction of the owner s equity in a business 1in keeping with double entry bookkeeping every journal entry requires both a debit and a credit because a cash withdrawal requires a credit to the cash account an entry that debits the drawing account will have an offsetting credit to the cash account for the same amount since the drawing account tracks distributions to owners in a given year it must be closed out at the end of the year with a credit representing the total withdrawn and the balance is transferred to the main owner s equity account with a debit the drawing account is then reopened and used again the following year for tracking distributions creating a schedule from the drawing account shows the details for and summary of distributions made to each business partner the appropriate final distributions may be made at year end ensuring that each partner receives the correct share of the company s earnings according to the partnership agreement because taxes on withdrawals are paid by the individual partners there is no tax impact on the business associated with the withdrawn funds 2recording transactions in the drawing accounta journal entry to the drawing account consists of a debit to the drawing account and a credit to the cash account a journal entry closing the drawing account of a sole proprietorship includes a debit to the owner s capital account and a credit to the drawing account for example at the end of an accounting year eve smith s drawing account has accumulated a debit balance of 24 000 eve withdrew 2 000 per month for personal use recording each transaction as a debit to her drawing account and a credit to her cash account the journal entry closing the drawing account requires a credit to eve s drawing account for 24 000 and a debit of 24 000 to her capital account 