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Drawing

The drawing account records the amount of withdrawal of cash or goods by a sole proprietor or a partner of a partnership for personal use. The drawing amount reduces the capital in a sole proprietorship or a partnership. However, withdrawals are not recorded in the capital account. Instead a drawing account is opened and all withdrawals are debited in the account.

Let’s assume a proprietor takes $100 cash out of the business for his own use. The following accounts are debited and credited.

  1. Debit the drawing account with $100
  2. Credit the cash account with $100

The drawing account is debited to contra the proprietor’s or partner’s capital account. As cash of $100 was withdrawn, the cash account, which is a debit balance, is credited to reduce the cash balance by this amount.

Withdrawal can be in the form of goods. It can happen that a sole proprietor or business partner takes goods or an item of stock for their own use without paying for them. Such withdrawal shares the same drawing account as the cash withdrawal. The following entries are made in the affected accounts to record the withdrawal.

  1. Debit drawing account
  2. Credit purchase account

The drawing account is debited to show the proprietor or partner has taken the goods for personal use. The purchase account is credited to show the reduction in the cost of goods which would otherwise be available for sale.

Sometimes a business owner’s private bill, e.g. telephone bill, is charged to the telephone account. A correction needs to be made, as follow:

  1. Debit drawing account
  2. Credit telephone account

The drawing account is debited with the amount of the private bill. The balance of the drawing account will be deducted from the proprietor’s capital account at the end of the accounting period. Crediting the telephone account removes the amount of the private bill which was wrongly entered in the account.

At the end of an accounting period, the following entries are made:

  1. Debit owner's capital account
  2. Credit the drawing account

The drawing account of a sole proprietor or partner is credited with the same amount as on the debit side to close it. The amount is debited to the capital account of the proprietor or partner, thus reducing it.


Interest on drawings

In a partnership, interest may be charged on each withdrawal to deter excessive cash withdrawal by a partner. After all, the more cash a firm has, the more steadily will it grow.

Last Updated (Thursday, 02 September 2010 19:22)