What Is Drawings in Accounting?

Drawings in accounting represent the withdrawal of cash or other assets from a business by its owner(s) for personal use. This concept applies to sole proprietorships and partnerships, where the business and its owners are not legally distinct entities. Drawings are not considered a business expense. Instead, they signify a reduction in the owner’s investment in the business.

Types of Owner Withdrawals

Owner withdrawals can take various forms beyond just cash. A common type involves direct cash withdrawals, where funds are transferred from the business bank account to the owner’s personal account. For example, an owner might take $500 from the register for personal spending.

Drawings also include the business directly paying for the owner’s personal expenses. This includes the business paying for the owner’s utility bills, personal travel, or credit card bills using business funds. Owners might also take inventory or other business assets for personal use, such as office supplies, products, or using a company vehicle for non-business trips. Each scenario constitutes a drawing, as business resources are diverted for personal benefit.

Recording Drawings in Accounting

Recording drawings involves accounting principles that reflect their impact on the business’s financial position. Drawings decrease owner’s equity, representing a return of capital rather than an operational cost. The journal entry for a drawing involves debiting a “Drawings” account and crediting the asset account from which the withdrawal was made, such as “Cash” or “Inventory.” For instance, if an owner withdraws $1,000 in cash, the entry debits the Drawings account by $1,000 and credits the Cash account by $1,000.

The Drawings account functions as a temporary equity account. At the end of an accounting period, the balance in the Drawings account is closed. This closing process transfers the total amount from the Drawings account to the owner’s capital account, directly reducing the owner’s overall equity. This ensures the owner’s capital account accurately reflects their remaining investment after personal withdrawals.

Effect on Financial Reports

Drawings directly impact a business’s financial reports, particularly the Balance Sheet. On the Balance Sheet, drawings are reflected as a reduction in the owner’s equity or capital account. This is because drawings decrease the owner’s claim on business assets. For example, if the owner’s initial capital was $50,000 and they made $5,000 in drawings, their ending capital balance would be $45,000.

Drawings do not appear on the Income Statement. This is because they are not a business expense incurred to generate revenue. Instead, they are a distribution of business assets to the owner. While drawings do not affect the net profit or loss, they are reflected in the Statement of Owner’s Equity, which reconciles capital balances.

Drawings Versus Other Business Payments

Drawings are distinctly different from other payments an owner might receive or make. Unlike a salary paid to an owner as an employee of an incorporated business, drawings are not a business expense and do not go through payroll. Legitimate business expenses, such as rent or utility payments, are incurred to operate the business and are tax-deductible. Drawings, however, are for the owner’s personal use and do not provide a tax deduction for the business.