Question

what are drawing accounts?

Answer 1

Drawing accounts are generally used in the sole proprietor or partnership firms. As the name suggests, they are the distributions made by the business to the owners of the company. Drawing account maintains a log of all the money withdrawn by the owners.

Tax implication - There is no implication of tax due to drawing accounts since tax on the money taken out of the business will be beared by the individual partner.

Nature of account - Drawing account is of capital nature. Although, it is a contra account and needs to be closed at the end of the year. All the banalce in drawing account is transferred to the equity at the year end. Although, it has a debit balance as it reduces the capital of the business which is credit in nature. Also, since the amount is taken out, so the cash account is credited. As per the dual accounting concept, same amount should be debited as well. This debit account is drawing account.

Example :

A partnership firm pays $2,000 to all three partners on a monthly basis. Journal Entry every month will be:

Drawing account 6000

To Cash (2000*3) 6000

At the end of the year, the balance of drawing account will be 6,000 * 12 = 72,000 (debit). The balance will be transferred to the owner's equity. So, owner's equity will be debited by $72,000 and credited drawing account. Hence, the closing balance of the drawing account will be zero.