Accounting plays a vital role in business, recording and managing the accounting of the business boosts your business growth. Drawing in accounting is the term that most people get confused about. Here in this blog, we have discussed what is drawings in accounting, their types, how you can record drawings in bookkeeping, and where the Drawing Account is Typically stored.
What is Drawing in Accounting, and its Types?
Drawing in accounting is the money that is used by the business owners from their business for their personal use. Drawing from an account is different from business expenses, like buying machinery for the company. Drawing in accounting are not shown on the income statement as it is not part of the business expense, drawings are just money that is taken from the owner’s own money, and they are not included in the business expenditure.
In simple terms, when you draw money from your business, you are making your loss from the money you own from the business. Drawing in accounts only refers to the records that are kept by the accountant or the owner, which show how much money the owner uses for themself. This money decreases the owner’s balance equity, but it does not affect the profit and loss report, as it is neither an expense nor a revenue for the business.
The Types of Drawings in Accounting
Accounts are of three types, which are listed below.
- Cash Drawings: The direct withdrawal of cash from the business is considered cash drawings by the owner.
- Non-Cash Drawings: Assets like machinery or equipment can be taken from the business for personal use by the owner, which will be included in the non-cash drawings.
- Salary drawings: In some small businesses, their owner takes a regular withdrawal from the business, which is not considered a part of a salary. As well, it is not part of the income statement because it is not included in the expenses of the business.
How do You Record Drawings in Bookkeeping?
We often record drawings as:
- Debit: All withdrawals of money by the owner are kept in the Drawings account
- Credit: Cash/bank account is credited when the business asset is decreased. Debited money from the business is credited to the owner’s personal bank account.
At the end of the year, the drawings account is not carried forward to the next period, it is closed to the owner’s capital account.
Where is the Drawing Account Typically stored?
- Balance Sheet: A drawing account is typically stored in the equity section of the balance sheet. Under the owners’ equity or partners’ equity, you will find the drawings account, it decreases the equity of the business owner.
- General Ledger: The drawing ledger is a separate line item under the Equity section in the general ledger. When the owner takes the money from the business, then the drawing account gets debited and credited to the cash or bank account of the owner.
How do Drawings Affect your Financial Statements?
Drawing is recorded when the owner withdraws assets from the business, and this action reduces the business assets and the equity of the owner. Drawing does not affect profit or loss but reduces the total equity, drawings do not show in the cash flow statement but are seen in the changes of the owners’ equity. Proper documentation is very important in the business to maintain transparency, trust, and ensure accurate financial reporting.
Are drawings assets or expenses?
Drawings are neither an asset nor an expense, they are classified as equity reductions. Drawings and salaries are different in the business industry. Here you will get to know it in brief by the differentiating drawings and salary:
- Salaries: When the owner is taking a monthly salary from the business, which is common in small-scale businesses, then it is treated as a business expense, and it will also affect the income statement.
- Drawings: If the owner is taking money from the business in the form of drawings, then it will not be considered as an expense of the business, and it will not affect the income statement.
Conclusion
Owners draw accounting just reflects the equity of the owner, and does not affect the business’s overall health. An owner’s drawing in accounting is used to track the withdrawal of money or assets by the owner. It helps us to maintain records, and it is also used in many accounting software, such as owner’s draw in QuickBooks.