What are drawings in accounting?

In this blog, you will understand the drawing in accounting along with its characteristics and other concepts.

It can be challenging to monitor money flow into and out of business. From an accounting standpoint, using specialist language to describe how money moves in a business can help track and comprehend it. Drawings or a drawing account are two terms accountants use to denote withdrawing funds from an account. Let’s understand the concept of drawings in accounting.

Table of Content

Drawings meaning
What is the Meaning of Drawings in Accounting?
Characteristics of Drawings Accounts
How Drawings in Accounting Work
Who Uses a Drawings Account?
Recording Transactions in the Drawings Account

Must read- What is Accounting?

Drawings Meaning

Drawings are the taking of money or other assets from a firm. If the company has gone public, the owner or partner may utilize this money for dividends or personal purposes. Drawings are not the same as costs or salary paid to the company. Drawings are noted as a reduction in the owner’s assets and equity.

Must read- Difference between Public and Private Company

What is the Meaning of Drawings in Accounting?

The drawing account includes assets rather than just money or cash since money, cash, or funds are a type of asset. It is a current asset of the business and one of many assets that the owner(s) may take out for their own use.

Consequently, the drawings also include any assets removed for personal use by the owner, such as machinery and unsold items from the closing inventory. The drawing’s account records any withdrawal from the firm that reduces the total owner equity or the company’s total capital.

Must read- Difference Between Debt and Equity

Example

A modest cafe owner has friends visiting from out of town. One morning, they go to the cafe for coffee and pastries but do not conduct business there. The business owner adds up their meal costs to deduct the cost of their meals from their drawing account and put it into their cash account. These are things, not cash withdrawals, but since they are business assets utilized for personal purposes and are recorded as such, they count against the drawing account even if they are not cash withdrawals.

Characteristics of Drawings Accounts

1. Helps Track Capital used for Personal Use

The draws account aids in keeping track of the entire amount of money taken out of the company for personal usage. It assists in keeping tabs on owner withdrawals and supports keeping the company’s total capital balanced.

2. Not a Continuing/Permanent Account

Since the balance transfers to the owner’s equity at the end of a fiscal year, drawings are not a continuous or permanent account. If any, it is only be used once again next year to keep track of the business withdrawals from that year. As a result, it is a one-time account rather than one that is ongoing or permanent.

3. Not an Expense Account

The drawing account is a debit account that deducts from the total amount of money accessible in the company, but it is not an expenditure account because the company made no expenses. Instead, it is just a decrease in the company’s overall equity for personal benefit.

Instead of appearing on the balance sheet, the drawings account would appear in the business’ profit and loss (P&L) account if it were an expense account.

How Drawings in Accounting Work

A business owner typically transfers money from their drawing account to their cash account. This is due to the requirement that every debit be balanced by a credit when using a dual-entry accounting system, a common organizing method for commercial bookkeeping. It is common practice to open drawing accounts at the start of each year and close them at the end in order to track money that has been withdrawn from a company during the year.

Who Uses a Drawings Account?

Small business entrepreneurs in a sole proprietorship or partnership typically use drawing accounts. This is because larger organizations frequently have many stakeholders, making it difficult to manage the logistics of enabling drawing. The question of who is eligible to what amount might get complex by different ownership levels. Large firms typically distribute their earnings by paying employees or issuing dividends.

Drawing accounts make more sense for small businesses because they typically have a higher direct owner involvement. Owner-operators, who run their own small business, may need to make business expenditures or borrow money from their company’s equity to pay for personal purchases. A drawing account can be the best option in certain cases.

Recording Transactions in the Drawings Account

A debit from the drawing account and a credit from the cash account make up a journal entry for the drawing account. A journal entry that closes the drawing account of a sole proprietorship includes both a debit to the owner’s capital account and a credit to the drawing account.

For instance, Eve Smith’s drawing account has a debit balance of $24,000 at the conclusion of an accounting year. Eve took out $2,000 every month for her own use, debiting her drawing account and crediting her cash account for each withdrawal. Eve must credit her drawing account with $24,000 and debit her capital account with $24,000 as part of the journal entry that closes the drawing account.

Conclusion

Before taking money or other assets out of their company, small business owners should be aware of the regulations. Owner draws serve as a means for business owners to pay themselves and can be useful. However, it’s crucial to remember that they are not regarded as business expenses, must be accurately recorded, and, if taken in excess, can financially undermine the company.