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Drawing Account

Candlefocus Editor
A drawing account is a financial management tool used in businesses operated as sole proprietorships or partnerships. Specifically, a drawing account is set up to track any money and other assets that are withdrawn from the business by its owner(s). This could include money used to cover personal expenses, income taken out as salary or wages, or other asset withdrawals such as supplies and merchandise. It is kept separate from the operating account or ledger of the business, but is usually linked to it or derived from it.

The drawing account acts as a contra account to the business owner’s equity. Whenever there is an entry that debits the drawing account, there is an offsetting credit in the cash account in the same amount. This ensures that the financial position of the business is not inaccurate as withdrawals are made. In addition, the drawing account can help the business owner keep track of how much money has been withdrawn and allocated for various categories of expenses.

The drawing account is closed out at the end of each year and the balance is transferred to the owner’s equity account. The account is then reestablished in the new year, either with the same starting balance that was from the previous year or with a different amount. The drawing account thus acts as a record for both expenses as well as an accounting device for the allocations of monies taken from the business.

Using a drawing account provides a number of advantages for the business owner. It enables the tracking of money and other assets taken out of the business, assists with making sure that the stated financial position of the business is not corrupted, and can help with keeping a record of the allocations of monies taken from the business. As such, the drawing account serves as an essential financial management tool for businesses run as a sole proprietorship or partnership.

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