What Is a Drawing Account and How Does It Work?

A drawing account is an equity account designed to track monetary and asset withdrawals made by a business owner for personal use. This accounting tool ensures a clear distinction between personal finances and business operations.

Understanding the Drawing Account

A drawing account is an owner’s equity account used to record withdrawals of cash or other assets by the owner(s) of a business for their personal expenses. Its purpose is to maintain a clear separation between the owner’s personal finances and business activities.

Businesses that typically utilize a drawing account include sole proprietorships and partnerships. In these structures, the owner’s personal funds and business funds are often intertwined, making a drawing account an effective way to track personal distributions. Corporations do not use drawing accounts because owners, who are shareholders, receive distributions as salaries, dividends, or other formal compensations. A drawing account is considered a temporary account, meaning its balance is reset at the end of each accounting period.

Recording Drawing Transactions

Drawing accounts operate within the double-entry accounting system, which requires every transaction to have at least two entries that balance each other. When an owner makes a withdrawal, the drawing account is increased by a debit entry. This debit reflects the reduction in the owner’s equity in the business.

Common examples of drawing transactions include an owner taking cash directly from the business bank account for personal living expenses or using business funds to pay a personal utility bill. Another instance could be an owner removing inventory from the business for personal consumption, such as a bakery owner taking bread home. For each debit to the drawing account, there is a corresponding credit to an asset account, such as Cash, Inventory, or Accounts Payable, depending on the nature of the withdrawal. This recording method highlights that these are personal withdrawals and distinct from legitimate business expenses, which are recorded differently.

Year-End Accounting for Drawing Accounts

At the close of an accounting period, the drawing account directly impacts the owner’s equity in the business. Each withdrawal reduces the owner’s total investment or capital within the entity. This reduction is important for accurately reflecting the residual claim the owner has on the business’s assets.

The balance in the drawing account is “closed out” at the end of the fiscal year. This involves transferring its balance to the owner’s capital account. The specific closing entry typically involves a credit to the drawing account, which brings its balance to zero, and a corresponding debit to the owner’s capital account. This process ensures that the drawing account starts each new accounting period with a zero balance, ready to record new withdrawals. The final balance of the owner’s capital account, after accounting for net income and drawings, is then reflected on the business’s balance sheet.