Drawings

Drawings

Introduction

It can be difficult to keep track of the flow of capital to and from or within an organisation. Using technical jargon to refer to the many ways money moves in a corporation can aid in tracking and understanding from an accounting standpoint. Drawing, or a drawing account, is a term used by accountants to describe the process of withdrawing money from an account. A drawing account is an account in financial accounting that primarily tracks the assets, mostly money, taken from a company by its owner(s) for their private use.

What is a “Drawing” from the Business?

Because money, cash, or funds are all types of assets, the drawing account definition covers assets as well as money/cash. It is a current asset of the corporation and one of several assets that the owner(s) might remove from the business for personal use.

As a result, even assets like equipment or unsold items from the inventory taken from the firm for the owner’s personal use are included in the drawings. In essence, a drawing is any withdrawal from the firm that decreases the total owner’s equity or total capital for the company and is documented in the drawings account.

Using Drawing Accounts

Drawing accounts are typically connected with unincorporated businesses such as partnerships and sole proprietorships. This is due to the fact that drawing accounts split the use of a firm’s money and assets from business use to personal use.

It is virtually necessary in certain organisations since, in the case of sole proprietorships and partnerships, the owner and the business are not independent entities. In contrast, with incorporated enterprises such as firms and multinational corporations, the business and the owner are separate entities, and so a drawing account is not necessary to separate the use of money and assets because the separation is already present.

A Drawing Account Has the Following Benefits: 

1. It aids in the tracking of funds utilised for personal purposes.

The drawings account is useful for keeping track of the entire amount of capital taken out of the firm for personal purposes. It aids in keeping a check on the owner’s withdrawals and in maintaining the company’s overall total capital balance.

2. It is not a permanent or continuing account.

It is not a permanent or continuing type of account in the view that it is balanced out in the ledger as a credit at the end of the fiscal year, and the excess is carried to the owner’s equity section or total capital of the balance sheet as a debit.

It is only utilised the next year to monitor any withdrawals from the firm that year. As a result, it is a temporary account rather than an ongoing or permanent one.

3. It is not an expense account.

While the drawing account is a debit account that displays a reduction in the overall amount of money accessible in the business, it is not an expenditure account because it does not represent an expense spent by the firm. Rather, it is merely a decrease in the company’s overall equity for personal use.

If the drawing account were an expenditure account, it would be included in the business’s profit and loss (P&L) account rather than the balance sheet.

Withdrawal of Accounting Entry

The drawing account’s generally accepted accounting entry is noted as a debit under the drawing account and a credit to the cash account (or whatever asset that is being withdrawn).

An Illustration of a Drawing Account

ABC Partnership pays Rs.5,000 every month to each of its two partners, and this transaction is recorded as a 10,000 INR credit to the cash account and a 10,000 INR debit to the drawing account. This has resulted in a total draw of Rs.120,000 from the partnership by the end of the year. The accountant transfers this money to the owners’ equity account by crediting the drawing account with Rs.120,000 and debiting the owners’ equity account with Rs.120,000.

Depiction on Balance Sheet 

The drawing account is indicated as a decrease on the equity side of the balance sheet to signify a withdrawal of total equity/total capital from the firm on a balance sheet as a contra-equity account.

Conclusion

It is essential to produce a schedule from the drawing account that shows the details and overview of distributions made to each partner in the business so that proper final distributions can be made at the end of the year to make sure that each partner receives his or her proportionate share of the business’ earnings, according to the terms of the partnership agreement. This is especially significant if there is a potential for disagreements over the distribution of cash among the partners.