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How to Record Drawing in Accounting

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    When you talk about accounts, you can list a lot of different types and each of them serves a unique purpose for its user. However, there are certain types of accounts that you do not find in banks. They are instead retained within businesses and one of the most used accounts in that niche are drawing accounts. These are accounts that many businesses dedicate to keep track of the expenses that business owners and other eligible members of the team incur when working for the business.

    Understanding how these accounts work and how to make proper drawing account records can help you in so many ways. We are going to tell you everything you need to know about drawings in accounting and how it affects your financial statements.

    What are Drawings?

    As mentioned in the beginning, drawing accounts are accounts that many businesses keep a record of in their financial statements against personal expenses incurred by eligible members of the team. This can be anything you can imagine really, and it is up to your own imagination as to what you would like to add to it. Just keep in mind that the act of cash drawing does not include anything that already has its section that it can be recorded in. For example, you cannot add things like purchasing raw material or paying rent for your office building as a part of drawing.

    Some common examples that you can find that would explain drawings meaning in accounting can include the following:

    1. Business owner pays his or her house rent by withdrawing money from the business account.
    2. Paying for personal expenses like dining in or shopping from your business account.
    3. Any other personal expense incurred by the owner or an eligible employee of the business from the business account.

    There are hundreds of other ways in which users can utilize a drawing account. When you would ask someone “what are drawings in your opinion?”, chances are that you will get a different answer every time. That is how versatile this account can be.

    What are Drawings in Accounting?

    The first thing you need to understand is the nature of the transaction that happens when an owner draws something out of their business for personal use. Since you are taking something out of the business, it will naturally be taken as a debit transaction. The question that comes from this is the account that gets affected from the withdrawal. This depends on the nature of withdrawal, and you will need to treat it accordingly.

    If the item being drawn is cash, then that is where the impact will be. You will create a debit transaction for the withdrawal in the owner’s account and a credit transaction will be made in the business’ cash account. If the item being drawn is not cash but an actual item, say from the business inventory, the transaction to be made will consider the cost value of the item that was taken by the owner.

    The way this transaction is recorded varies from business to business. The basic method applied is by reducing the capital of the business by the amount that was withdrawn from the business. However, this would only work if the business were a sole proprietorship. For larger businesses like partnerships or LLCs, the standard practice is to either have the amount returned by the person withdrawing the amount, or have it deducted from their salary. Some businesses also set up dedicated withdrawing accounts for their partners and other eligible members with a certain cash amount dedicated to it for their use. The placement of this money in the balance sheet is decided by the business itself and it can either be treated as a liability or an expense, depending on the system in place.

    What is Drawing Account in Nature?

    Drawing accounts are meant to be used as temporary accounts and they need to be balanced off by the business at the end of every financial year/period. Since there is no fixed place for a drawing account, this allows a lot of flexibility for businesses in terms of how they clear the final value.

     This is where the option to deduct from salaries, repayment to the business, or deduction from cash reserves can come into play.

    As for the decision on whether it should be an expense or a liability, the decision again goes back to the owners of the business. For small businesses where sole proprietorship is present, charging it as a liability is also an option. However, most businesses, especially large ones, treat drawings as an expense, even though the withdrawal is directly from the company account. This also highlights the importance of balancing and closing the account every year as it helps you avoid unnecessary confusion when making your financial statements.

    Summing Up…

    Drawings are an expense incurred by business owners for personal use and it has many benefits depending on the type of business. It can be a big relief for business owners, but if it is not managed carefully, it can create a lot of problems for your accounting. For virtual accounting services, visit Overdraw.io