Definition
The term drawing account is used to describe an account that records money and assets withdrawn from a company by its owners. Drawing accounts are typically associated with unincorporated businesses such as partnerships and sole proprietorships.
Explanation
Drawing accounts are used by business owners to separate business transactions from personal ones. They're of particular importance in partnerships, since they allow each partner to monitor the withdrawals of the other.
The drawing account is a contra-equity account, meaning it is subtracted from owner's equity to determine the net owner's equity value appearing in the balance sheet. A typical transaction involves a debit to the drawing account and a corresponding credit to cash.
At the end of each accounting period, the drawing account is closed out with a credit, and a debit is transferred to owner's equity.
Related Terms
- The term partnership is used to describe an unincorporated business entity that is owned by two or more persons. Partners own assets together, share in the business profits or losses, and are typically jointly liable for debts, legal actions, and the payment of taxes.
Moneyzine EditorNovember 6th, 2024 - A business entity that is owned by only one person is known as a single or sole proprietorship. The owner of a sole proprietorship is entitled to all of the profits of the business as well as its debts.Moneyzine EditorNovember 6th, 2024
- The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.Moneyzine EditorNovember 6th, 2024
