All you need to know about withdrawals and distributions of Owners' Equity in the Drawing Account
Definition: What is an Owner’s Drawing account?
Owner’s Drawing is a temporary contra equity account with a debit balance that reduces the normal credit balance of an Owner's Equity capital account in a business organized as a sole proprietorship or partnership by recording the current year’s withdrawals of asses by its owners for personal use.
Owner’s Drawing account is also known as Owner(‘s) Withdrawal(s), Owner(‘s) Draw(s), Owner(‘s) Distribution(s) or simply a Drawing Account.
Owner Draws vs. Treasury Stock
Another example of contra equityis Treasury Stock, which is an account that records buybacks made by listed companies to repurchase their own shares from investors in the open market.
| List of Equity Contra Accounts | ||
|---|---|---|
| Contra Account | Parent Account | Purpose |
| Owner Draw | Owners’ Equity | Sole proprietorship or partnership owners withdraw assets from their business for personal use |
| Treasury Stock | Shareholders' Equity | Listed company repurchases its own shares from the open market |
Owner’s withdrawals from a sole proprietorship or partnership business are treated differently for accounting purposes than a company’s share repurchase,dividends, compensation or employee payroll.
Keep reading to find out how >>>
Debit/Credit: Is Owner’s Drawing account debit or credit?
Owner’s Drawing account has a debit balance because it is a contra for an Owner’s Equity account that normally carries a credit balance and any funds paid out to owners reduce the equity they hold in a business as well as the total amount of capital present in that business overall.
| Debit or Credit – Owner’s Drawing Account | |||
|---|---|---|---|
| Account Name | Account Type | Debit | Credit |
| Owner’s Equity | Parent equity account | Decrease | Increase |
| Owner’s Draws | Contra equity account | Increase | Decrease |
Journal Entry: What is the journal entry for Owner’s Draw?
There are two journal entries for Owner’s Drawing account:
1. At the time of the distribution of funds to an owner, debit the Owner’s Drawing account and credit the Cash in Bank account.
2. At year-end, credit the Owner’s Drawing account to close it for the year and transfer the balance with a debit to the Owner’s Equity account.
| Journal Entries – Owner’s Drawing Account | |||
|---|---|---|---|
| Timing | Purpose | Debit | Credit |
| Throughout the year | Withdrawals by and distributions to business owners | Owner’s Draws | Cash in Bank |
| End of the year | Close Owner’s Drawer account and transfer balance to Owner’s Equity | Owner’s Equity | Owner’s Drawing |
Equity vs. Expense
Are Owner's Drawings equity or expense?
Owner’s Drawing account is a contra equity account–as opposed to an expense–because when owners withdraw funds out of a business (credit Cash in Bank), it results in a reduction of owners’ equity in that business (debit Owner’s Draws).
Temporary vs. Permanent
Is Owner Draw a temporary or permanent account?
Owner’s Drawing account is a temporary account that tracks distributions to owners in a one given year, at the end of which it is closed out (credit) and the balance is transferred to the main Owners’ Equity account (debit).
Next year, the Owner’s Drawing account is reopened with a zero balance to track distributions for the following period with a clean slate.
Example
Last year, Partnership A distributed $10,000 per month from the partnership business to its partners for personal use, resulting in a total cumulative annual withdrawal balance of $120,000.
| Example – Owner’s Drawing - Partnership A | ||
|---|---|---|
| Account | Debit | Credit |
| Monthly Withdrawal | ||
| Owners’ Withdrawals | $10,000 | |
| Cash in Bank | $10,000 | |
| Year-End Transfer | ||
| Owners’ Capital | $120,000 | |
| Owners’ Withdrawals | $120,000 | |
During the year, Partnership A’s bookkeeper recorded the monthly distributions of $10,000 (= $5,000 monthly distribution x 2 partners) with a debit to the Drawing account and a credit to the Bank account.
At the end of the year, Partnership A’s accountant credited the Drawing account to transfer the total annual withdrawal balance of $120,000 (= $10,000 monthly distribution for two partners x 12 months) to the main Owners’ Capital account with a debit.
Balance Sheet: Where are Owners' Draws in the financials?
Income Statement
Drawing accounts do not appear on an income statement because owner’s withdrawals are not an expense, but a reduction of owners’ equity in a business.
Balance Sheet
Drawing accounts reduce both the asset side and the equity side of a balance sheet because the total capital of a business decreases when some of its assets are distributed to the owners.
In the equity section of a balance sheet, the Owner’ Drawing contra-equity account debit balance is subtracted from the regular Owner Equity credit balance to arrive at the net capital total for the period.
| Owner’s Equity – Balance Sheet - Example | |
|---|---|
| Beginning Owner’s Equity | $25,000 |
| Owner’s Investment | $50,000 |
| Retained Earnings | $100,000 |
| (Less: Owner’s Draws) | ($50,000) |
| Total Closing Owner’s Equity | $125,000 |
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