Drawing Account

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Drawing Account

A drawing account records money or other assets an owner withdraws from a business for personal use. It’s commonly used in unincorporated entities such as sole proprietorships, partnerships, and many single‑member LLCs. Withdrawals by owners of corporations are typically handled differently (e.g., salary or dividends).

Key points

  • Tracks owner withdrawals of cash or other assets (equipment, inventory, etc.).
  • Acts as a contra equity account: it normally carries a debit balance that reduces owner’s equity.
  • Every withdrawal follows double‑entry bookkeeping: debit Drawing, credit Cash (or other asset).
  • The drawing account is closed at year‑end and its balance is transferred to the owner’s capital/equity account.
  • Owner draws are not business expenses and are not deductible by the business; owners report the tax consequences on their personal returns.

How it works

Owners can take funds or assets from the business for personal use. Each withdrawal is recorded when it occurs to show how much the owner has taken during the year. Because the drawing account reduces equity, it is treated as a contra account to the owner’s capital.

At year‑end the total withdrawals tracked in the drawing account are moved into the owner’s capital account. This resets the drawing account to zero for the new accounting year while preserving the cumulative effect on owners’ equity.

Note: Taxes on business income are handled at the owner level for pass‑through entities; the act of withdrawing funds itself does not create additional business tax.

Recording transactions

Typical journal entries:

  1. When an owner withdraws cash or an asset:
  2. Debit Drawing account

  3. Credit Cash (or the asset account being withdrawn)

  4. To close the drawing account at year‑end:

  5. Debit Owner’s Capital (reducing equity)
  6. Credit Drawing account (to zero out the drawing balance)

Example: If an owner withdraws $2,000 per month (total $24,000) during the year, each withdrawal is recorded as Debit Drawing $2,000 / Credit Cash $2,000. At year‑end the closing entry is Debit Capital $24,000 / Credit Drawing $24,000.

Common questions

  • What is the entry of a drawing account?
    Debit the Drawing account and credit Cash (or the specific asset) when the withdrawal occurs.

  • Is a drawing account an asset?
    No. It represents withdrawals that reduce the business’s assets and owner’s equity; the drawing account itself is a contra equity account and normally carries a debit balance.

  • Are owner draws an expense?
    No. Owner draws are personal distributions and are not recorded as business expenses; they do not reduce taxable business income.

Bottom line

A drawing account provides a clear record of owner distributions in unincorporated businesses. Properly recording and closing the drawing account preserves accurate equity balances, helps with partner allocation, and avoids confusing personal withdrawals with business expenses. For tax and reporting guidance, consult relevant tax publications (for example, IRS Publication 334 and Publication 541) or a qualified tax advisor.