What Is a Drawing Account in Accounting?

A drawing account is an accounting tool business owners use to track personal withdrawals from their business. It helps maintain a clear distinction between business finances and an owner’s personal expenditures.

Understanding What a Drawing Account Is

A drawing account is a temporary owner’s equity account to record when business owners withdraw cash or other assets for personal use. These withdrawals are distinct from business expenses or operational costs. The account helps maintain a clear separation between the owner’s personal financial activities and the business’s financial operations.

A drawing can include cash or other assets, such as equipment or products, taken from the business for personal benefit. It reflects the owner’s personal financial activity separately from the business’s operational activity, ensuring accurate financial record-keeping.

How Drawing Accounts Impact Owner’s Equity

Drawing accounts directly reduce the owner’s equity in a business. When an owner takes a withdrawal, the accounting entry involves a debit to the drawing account and a corresponding credit to the cash account or the asset account. This action decreases both the assets of the business and the owner’s total equity.

At the end of each accounting period, the drawing account is closed. Its balance, representing total withdrawals for the period, is transferred to the owner’s capital account. This closing entry involves a debit to the owner’s capital account and a credit to the drawing account, effectively reducing the capital balance. Since the drawing account is temporary, its balance is reset to zero at the start of each new fiscal year, preparing it to track new withdrawals. This process ensures that the balance sheet accurately reflects the diminished owner’s equity resulting from these personal withdrawals.

Common Scenarios for Drawing Account Use

Drawing accounts are most common in unincorporated business structures, specifically sole proprietorships and partnerships. In these business forms, the owner and the business are considered a single entity for accounting purposes, making direct withdrawals for personal use a common practice. Owners in these structures often take draws instead of formal salaries or dividends, which are typical in corporate environments.

For sole proprietors, the owner’s draw is the primary method of compensating themselves, as they cannot legally pay themselves a W-2 salary. Similarly, in partnerships, each partner has a drawing account to track their individual withdrawals from the partnership’s equity. This contrasts with corporations, where owners are compensated through formal salaries, which are considered business expenses, or through dividends, which are distributions of profits to shareholders.