Is a Drawing Account an Asset? An Accounting Explanation

A drawing account tracks assets or funds an owner withdraws from a business for personal use. This article explains why it is not considered an asset. Understanding this distinction is fundamental for accurately interpreting a business’s financial health and adhering to accounting principles.

What is a Drawing Account

A drawing account is an accounting record used primarily by sole proprietorships and partnerships to track money or other assets that owners withdraw from the business for their personal expenses or use. These withdrawals are distinct from business expenses and serve to reduce the owner’s stake in the company. The account ensures a clear separation between personal and business finances, which is important for accurate record-keeping.

The drawing account captures instances where the owner takes cash, uses business assets for personal errands, or removes unsold products from inventory for private consumption. It is a temporary account, meaning its balance is typically closed out at the end of each accounting period. This closure transfers the total withdrawals to the owner’s capital account, directly reflecting a reduction in the owner’s equity.

Understanding Assets and Equity

An asset is anything a business owns or controls that has measurable value and is expected to provide future economic benefits. Assets can be tangible, like cash, equipment, or buildings, or intangible, such as patents and trademarks. These resources appear on a company’s balance sheet and are categorized based on their liquidity and how they contribute to the business’s operations.

Owner’s equity represents the owner’s residual claim on the assets of the business after all liabilities have been satisfied. It is often referred to as the “net worth” of the business. The fundamental accounting equation, Assets = Liabilities + Equity, illustrates this relationship, ensuring that a company’s resources are always balanced by claims against those resources. Owner’s equity increases with owner investments and net income, while it decreases with net losses and owner withdrawals.

Why Drawing Accounts are Not Assets

A drawing account is not an asset because assets are resources owned by the business that provide future economic benefit. Conversely, drawing accounts record funds or assets that are taken out of the business by the owner for personal use, thereby reducing the business’s resources. These withdrawals decrease the owner’s claim on the business, rather than representing something the business itself owns or controls for future benefit.

Drawing accounts are classified as contra-equity accounts, which means they reduce the total owner’s equity shown on the balance sheet. Unlike an expense, which reduces a business’s net income, drawings directly reduce the owner’s capital. They have a debit balance, which is contrary to the typical credit balance of other equity accounts, signifying a reduction in the owner’s investment in the entity. This distinction is important for maintaining an accurate representation of the business’s financial position.

Where Drawing Accounts Appear

While a drawing account does not appear as a separate line item on the balance sheet, its effect is reflected in the reduced owner’s equity balance. The impact of drawings is also visible on the Statement of Owner’s Equity (or Statement of Changes in Equity), where they are shown as a deduction from the owner’s capital. For example, if an owner withdraws cash, the business’s cash asset decreases, and simultaneously, the owner’s equity decreases by the same amount. Drawings do not affect the income statement because they are not considered business expenses, and they may appear in the financing activities section of the statement of cash flows.