Owner’s Draws: A Complete Guide to Owner Drawings

All you need to know about withdrawals and distributions of Owners' Equity in the Drawing Account

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Contents

Definition: What is an Owner’s Drawing account?

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 equity is 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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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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