What Is the Cash Drawing Account in Accounting?
- An "account" in the context of "cash drawing account" is not an account in the sense of a bank savings or checking account. Instead it is purely an on-paper account used to record a specific type of transaction. In this case the transaction is withdrawals from the financial holdings of the business.
- As with all accounting under the double entry system, every time an owner withdraws money from the business, it is listed as both a debit and a credit. The debit is made to the drawing account, rather like taking money out of a bank account. The credit is made to a separate cash account. This details the amount of money that has been taken out of the company's finances and turned into cash, in the same way as a business might do with petty cash spending.
- At the end of the financial year, a business will close its accounts, which means making a series of on-paper adjustments that resets many of the individual day-to-day accounts to zero, ready to start the new year from scratch. With a drawing account, this means marking up a credit that matches the sum of the debits during the year, thus bringing the account back to zero. This credit is matched by an equal debit being made to the owner's equity, which measures how much money the owner has put into the business but not yet taken out.
- With partnerships, there will be separate drawing accounts for each partner, which makes keeping track of who has received what amount easy. This is taken into account when dividing profits at the end of the year; any withdrawings a partner has made are deducted from his share.
With corporations, there is no need for a drawing account. Owners instead receive income either as a salary from the company, as dividends, or as a combination of both.