What is Drawing in Accounting? – Accounting for Beginners by Student Tube
How does a drawing account work?
Typically, a business owner’s drawing account is credited with money and their cash account is debited. This is due to the fact that when using a dual-entry accounting system, a popular organizational technique for business bookkeeping, it is crucial for every debit to match a credit. Drawing accounts are typically opened at the start of the year and closed at year’s end because they are used to track money taken out of a business over the course of a year.
What is drawing in accounting?
Drawing, in accounting, is the act of taking money out of a company’s holdings or from an account for personal use. When a business owner is a sole proprietor or partner, they frequently use drawing accounts. The term “drawing” can also refer to objects taken out of a business for private use. It’s crucial to keep in mind that drawings differ from business expenses like routine overhead or repairs. Different accounting principles are used to account for these expenses.
How can you manage drawings in your accounts?
Maintaining accurate records is a crucial component of managing a drawing account. Keep careful track of the money you take out of your drawing account so you can compare it to your cash account. Keep track of other withdrawals besides money, such as items you take for yourself.
To ensure that each person receives an accurate sum of money or product, keep track of the information if you have multiple owners or partners making withdrawals. To keep track of account activity, think about reconciling your drawing account frequently. Make sure to take careful note of every amount on the company balance sheet.
Why is a drawing account important?
Because they keep track of business withdrawals over the course of a year, drawing accounts are crucial. This can be crucial for both basic accounting and tax purposes. Drawings reduce owners’ business equity at year’s end, so following best practices for drawing can help maximize overall revenue and possibly the success of the business. It’s crucial to keep track of these distributions when balancing business accounts because it’s useful for tracking taxes and an organization’s financial health.
Who uses drawing accounts?
In a sole proprietorship or partnership, small business owners typically use drawing accounts. This is because larger corporations typically have a lot more stakeholders, and it would be challenging to manage the logistics of allowing drawing. Who is entitled to what sums of money can become more difficult to determine when there are various levels of ownership. Large corporations typically pay wages or distribute dividends to distribute their earnings because of this.
Drawing accounts make more sense for small businesses because they typically have a higher level of direct owner involvement. Owner-operators, or small business owners who work for themselves, may need to make business purchases or borrow money from their company’s equity to pay for personal expenses. In these cases, a drawing account may be the best course of action.
Examples of how to use a drawing account
Here are some instances of how entrepreneurs might make use of a drawing account:
The proprietor of a small boutique needs money to pay for postage for a personal mailing expense while running errands nearby. They stop at their store to borrow money from the register because they don’t have the money with them at the time. To ensure that it can be credited to their cash account and balanced at the end of the reporting period, they carefully record this money as a deduction from their drawing account. Due to the fact that they are using business funds for personal expenses, this is a legal use of a drawing account.
A local pizzeria’s two partners decide on a cash payment of $1,000 per month for each of them. Each of them receives a cash payment from them on a regular basis. As withdrawals from the drawing account, they record their cash income and credit it to their individual cash accounts.
They should each have added $12,000 to their cash account and removed $12,000 from their drawing account by the end of the year. Because the money taken out of the business is equal to the money added to the cash account, this use of the drawing account balances.
The proprietor of a private preschool notices they need fuel as they are traveling to a vacation spot. Because they only have their business debit card with them, they use it to buy gas. They keep the receipt and charge the fuel expense to their drawing account. To ensure that their books balance at the end of the reporting period, that sum is then added to their cash account.
Because they are using company money for personal expenses and recording the transaction in both the drawing account and the cash account, this is a legal use of the drawing account.
Friends are visiting the owner of a small cafe from out of town. One morning, they go to the cafe for pastries and coffee, but they don’t discuss any business there. The proprietor adds up their meal expenses so they can deduct them from their drawing account and add them to their cash account. These items count against the drawing account even though they are not cash withdrawals since they are business assets used for personal purposes and are recorded as such.
Is drawing asset or liability?
Drawings are a contra entry that involves the owner’s capital account and drawings account, so they are neither a liability nor an asset.
Are drawings an asset or expense?
The drawing account represents a decrease in the owners’ equity in the company rather than an expense because it is not an expense. The drawing account’s purpose is to keep track of distributions to owners over the course of a single year. Upon closing the account (with a credit), the remaining balance is transferred to the owners’ equity account (with a debit).