How to Close an Owner’s Drawing Account

An owner’s drawing account serves as a temporary record for personal withdrawals made by the owner(s) of a sole proprietorship or partnership. This account tracks money or other assets taken from the business for personal use, distinguishing these personal distributions from business expenses. At the conclusion of each accounting period, the balance in this account is transferred to the owner’s capital account. This process, known as “closing” the drawing account, ensures that the financial records accurately reflect the owner’s remaining investment in the business for the new period.

Understanding the Owner’s Drawing Account

The owner’s drawing account is classified as a contra-equity account within the equity section of the balance sheet. This means it reduces the overall owner’s equity in the business. Unlike expense accounts, which appear on the income statement and reduce net income, owner’s draws are not considered business expenses and therefore do not impact the business’s profitability or taxable income.

This account records various types of personal withdrawals. Common examples include cash taken from the business bank account for living expenses, using business funds to pay for personal bills, or transferring business assets, such as equipment or inventory, for personal use. Maintaining a separate drawing account allows for clear tracking of these personal distributions throughout the accounting period, providing a transparent view of how much the owner has withdrawn.

Determining the Account Balance

Before closing the owner’s drawing account, it is necessary to determine its current balance. This balance represents the total amount of personal withdrawals made by the owner during the accounting period. To find this total, you will need to review your business’s general ledger or financial reports generated by your accounting software.

Accessing the general ledger for the specific owner’s drawing account will show all the individual debit entries recorded throughout the year. The cumulative total of these debits provides the balance that needs to be closed. It is important to ensure that all personal withdrawals have been accurately recorded in this account to guarantee the correct balance is used for the closing entry.

Executing the Closing Entry

Closing the owner’s drawing account involves a specific journal entry to transfer its balance to the owner’s capital account. This action effectively resets the drawing account to a zero balance, preparing it for the next accounting period. The journal entry for this process involves debiting the owner’s capital account and crediting the owner’s drawing account for the total balance determined previously.

For example, if the owner’s drawing account has a debit balance of $15,000 at year-end, the journal entry would be a debit of $15,000 to the Owner’s Capital account and a credit of $15,000 to the Owner’s Drawing account. This debit to the capital account reduces the owner’s total equity in the business, reflecting the personal funds withdrawn throughout the year. In accounting software like QuickBooks or Xero, this closing process may be automated as part of year-end procedures or require a manual journal entry.

Verifying the Closure

After executing the closing entry, verifying the closure of the owner’s drawing account is an important final step. This verification confirms that the account now holds a zero balance, ready for the new accounting period. You can check this by reviewing the general ledger for the owner’s drawing account, where its balance should appear as zero.

This closing entry also impacts the owner’s capital account on the balance sheet. The owner’s capital account will now reflect the net effect of the business’s profits or losses for the period, as well as the total amount of owner’s drawings. The balance sheet provides a summary of the business’s financial position at a specific point in time, and the updated capital account accurately presents the owner’s equity after all year-end adjustments.