In accounting, drawings refer to the withdrawals made by the owner of a business for personal use. These withdrawals are recorded in a drawing account, which is not a bank account but rather a record kept by the business owner or accountant that shows how much money has been withdrawn. It is important to keep accurate records of these withdrawals because they need to be offset against the owners equity.
Drawings affect a companys financial statements by showing a decrease in the assets equivalent to the amount that is withdrawn. They also represent a decrease in the owners equity as the owner is essentially cashing in on a small piece of their entitlement to the company. Drawings will also show up on a statement of cash flows as they represent a type of financial activity and need to be accurately recorded by the companys accounting departments.
To record drawings in accounting, an owner withdrawal is typically recorded as a debit on the balance sheet. If the withdrawal is made in cash, this can easily be quantified at the time of the withdrawal. A drawing account acts as a contra account to the business owners equity, meaning that an entry that debits the drawing account will have an offsetting credit to the cash account in the same amount. At the end of each year, the drawing account is closed out, and the balance is transferred to the owners equity account, and then reestablished in the new year.
It is important to note that drawings are not the same as expenses or wages, which are charges to the firm. Drawings are recorded as a reduction in the owners equity as well as in the assets.
