What Are Owner’s Drawings in Accounting?

“Owner’s drawings” refers to money or other assets an owner withdraws from their business for personal use. This term is primarily relevant to sole proprietorships and partnerships. These withdrawals are distinct from business expenses and represent a common way for owners of unincorporated businesses to access the profits of their enterprise. Understanding how drawings function is important for accurate financial record-keeping and managing business equity.

Defining Owner’s Drawings

Owner’s drawings are any withdrawal of cash or other business assets by the owner for purposes unrelated to the business. This can include taking cash for personal living expenses, using business funds for personal bills, or taking inventory or equipment for private use. Unlike business expenses, drawings are not considered a cost of doing business and do not appear on the income statement.

These withdrawals directly reduce the owner’s investment, or equity, in the business. A “drawing account” records these transactions, primarily in unincorporated business structures like sole proprietorships and partnerships.

Accounting for Drawings

Owner’s drawings are recorded using the double-entry system. A “Drawings Account” or “Owner’s Withdrawals Account” is debited, and the asset being withdrawn, usually Cash, is credited. For example, if an owner takes $2,000 in cash, the journal entry debits the Owner’s Draw account for $2,000 and credits the Cash account for $2,000.

The Drawings Account functions as a contra-equity account, reducing the Owner’s Capital or Equity Account’s normal credit balance. It is considered a temporary account, tracking withdrawals made by owners within an accounting period. At the fiscal year-end, the Drawings Account balance is closed out by crediting it and debiting the Owner’s Capital/Equity Account, decreasing owner’s equity on the balance sheet.

This accounting treatment ensures drawings do not impact the business’s net income or loss on the income statement, as they are not business expenses. Their effect is confined to the balance sheet, reducing the specific asset withdrawn and overall owner’s equity. Cash drawings also appear in the financing activities section of the statement of cash flows.

Drawing vs. Other Owner Payments

For sole proprietorships and partnerships, owners generally take drawings for personal use instead of a traditional salary. For tax purposes, the business and owner are often treated as a single entity, meaning the owner’s income is the business’s net profit, regardless of withdrawal amounts. Unlike employee salaries, drawings are not a tax-deductible business expense for the entity.

Owners of corporations (S corporations or C corporations) typically receive a salary as employees. This salary is a deductible business expense for the corporation, with payroll taxes withheld. S corporation owners may also receive distributions, sometimes referred to as owner’s draws, which are distinct from salaries and are not subject to payroll taxes but are still taxable income to the owner.

Owner’s drawings also differ from loans. A drawing is a permanent reduction in owner’s equity, with no expectation of repayment to the business. Conversely, a loan from the business to the owner creates a receivable, implying future repayment. When an owner personally pays for a business expense and seeks reimbursement, it is recorded as a business expense, not a drawing, as it relates to business operations.