In accounting, drawings represent personal withdrawals made by the owner from business resources, typically in sole proprietorships and partnerships. These withdrawals reduce the owner’s capital but are not treated as business expenses. Understanding drawings is vital for maintaining accurate equity figures, complying with accounting principles such as the Entity Concept, and preserving a clear distinction between personal and business finances. Under IFRS and U.S. GAAP, drawings are treated as a reduction in equity, not an expense, ensuring that profit and loss statements reflect only operational results and not personal transactions.
1. What Are Drawings?
Definition
Drawings refer to any amount, asset, or service withdrawn by the owner from the business for personal use. They can include cash withdrawals, goods taken for domestic purposes, or personal use of business property. For instance, if a café owner withdraws $500 from the cash register for home use, that amount is recorded as a drawing rather than an expense.
Key Features
- Reduction in Equity: Drawings decrease the owner’s capital, reflecting a personal withdrawal of resources rather than a business outflow.
- Not an Expense: They do not reduce net profit or appear in the income statement.
- Applicable to Owners: Only withdrawals by owners—not salaries paid to employees or partners—are classified as drawings.
This treatment aligns with IAS 1 Presentation of Financial Statements, which requires equity changes unrelated to income or loss to be presented directly in the statement of changes in equity rather than in the profit and loss account.
2. Drawings in the Accounting Equation
The standard accounting equation is:
Assets = Liabilities + Equity
When drawings occur, the owner’s equity decreases. The modified equation becomes:
Assets = Liabilities + (Equity − Drawings)
This ensures that the accounting equation remains balanced while accurately reflecting the owner’s reduced claim on business resources. For partnerships, each partner’s drawings are tracked separately under their individual capital accounts, a practice emphasized under IAS 1 §106 for disclosing changes in equity.
3. Examples of Drawings
Example 1: Cash Withdrawal
The owner withdraws $5,000 from the business bank account for personal use.
- Assets: Cash decreases by $5,000.
- Liabilities: No change.
- Equity: Decreases by $5,000 (drawings).
Updated Equation: Assets (−$5,000) = Liabilities ($0) + (Equity − $5,000)
This transaction reduces available cash but does not affect the profit figure reported in the income statement.
Example 2: Goods Taken for Personal Use
The owner removes $2,000 worth of inventory for household consumption.
- Assets: Inventory decreases by $2,000.
- Liabilities: No change.
- Equity: Decreases by $2,000 (drawings).
Updated Equation: Assets (−$2,000) = Liabilities ($0) + (Equity − $2,000)
According to IAS 2 Inventories, such goods are removed from business stock at cost value and recorded as drawings, ensuring that gross profit is not overstated.
Example 3: Personal Use of a Business Vehicle
The owner uses a business car for personal errands. The value of private use is $500.
- Assets: Fixed assets (vehicles) decrease by $500 due to personal use.
- Liabilities: No change.
- Equity: Decreases by $500 (drawings).
Updated Equation: Assets (−$500) = Liabilities ($0) + (Equity − $500)
This ensures that the business records the fair value of private use as a reduction in ownership capital rather than a business expense.
4. Recording Drawings in Financial Statements
A. Capital Account
Drawings are debited to the owner’s capital account, which reduces the closing capital balance. The journal entry is:
Debit: Drawings Account
Credit: Cash/Inventory/Asset Account
At the end of the accounting period, the drawings account is closed to the capital account.
B. Balance Sheet Presentation
The equity section of the balance sheet reflects drawings as a deduction from the owner’s capital. For partnerships, drawings are shown separately under each partner’s equity balance to maintain transparency.
C. Profit and Loss Statement
Since drawings are not expenses, they never appear in the profit and loss statement. This aligns with the Entity Concept and ensures that business profits reflect only operating activities.
5. Importance of Tracking Drawings
A. Maintaining Accurate Records
Recording drawings ensures the balance sheet presents the true financial position of the business. Failure to record them may overstate capital, leading to inaccurate solvency ratios.
B. Separating Personal and Business Finances
Accurate recording of drawings helps enforce financial discipline and supports the accounting principle that the business and owner are separate entities. Under IFRS for SMEs §2.12, this separation is required even when legal ownership overlaps.
C. Supporting Decision-Making
Drawings data inform owners and accountants about how much capital is being extracted from the business. High drawings compared to profits may signal liquidity pressure or unsustainable cash outflows.
D. Tax Compliance
Tax authorities often review drawings to ensure owners are not withdrawing business funds disguised as personal expenses. Accurate recording helps avoid penalties and audit discrepancies.
6. Managing Drawings Effectively
A. Establishing Owner’s Salary or Allowance
In many jurisdictions, small business owners set a fixed monthly withdrawal to avoid erratic cash flow. This improves budgeting and prevents overdrawn capital accounts.
B. Using Separate Bank Accounts
Maintaining distinct accounts for business and personal use prevents unrecorded withdrawals and ensures that bank reconciliations align with accounting records.
C. Monitoring the Drawings-to-Profit Ratio
A practical ratio to monitor is:
Drawings-to-Profit Ratio = Total Drawings ÷ Net Profit × 100
If drawings consistently exceed 80% of net profit, it may indicate that the business is undercapitalized or excessively dependent on owner withdrawals.
7. IFRS and GAAP Perspectives on Drawings
While IFRS and GAAP do not use the term “drawings” explicitly, they recognize similar concepts under owner withdrawals or distributions to owners. The key treatment is the same:
| Aspect | IFRS Treatment | U.S. GAAP Treatment |
|---|---|---|
| Definition | Distributions to owners, recorded directly in equity (IAS 1 §109). | Owner withdrawals reduce capital, not income (FASB ASC 505-10). |
| Financial Statement Location | Statement of Changes in Equity. | Statement of Owner’s Equity or Balance Sheet. |
| Effect on Profit | No impact on net profit or loss. | No impact on income statement results. |
| Disclosure | Disclosed separately from dividends and other equity movements. | Reported as reductions to owner’s capital account. |
This harmonization ensures comparability between jurisdictions and supports consistent global reporting practices.
8. Real-World Application: Small Business Scenario
Consider “Blue Haven Bakery,” a sole proprietorship. During the year, the owner invested $60,000, earned a profit of $30,000, and withdrew $15,000 for personal expenses. The year-end equity is calculated as follows:
Owner’s Equity = Capital ($60,000) + Profit ($30,000) − Drawings ($15,000) = $75,000
The drawings did not affect profit but reduced the overall claim the owner has on the business. Had the owner withdrawn $40,000 instead, equity would fall to $50,000—potentially limiting access to external financing because lenders assess equity as a measure of stability.
9. Summary Table: Effects of Drawings on Financial Elements
| Transaction Type | Effect on Assets | Effect on Liabilities | Effect on Equity |
|---|---|---|---|
| Cash Withdrawal | Decrease | No Change | Decrease |
| Goods for Personal Use | Decrease | No Change | Decrease |
| Personal Use of Assets | Decrease (Fair Value) | No Change | Decrease |
| Business Expense | Decrease | No Change | No Change (affects profit, not drawings) |
Balancing Ownership and Accountability
Drawings reflect the ongoing relationship between business ownership and personal use. They reduce equity but leave profit untouched, ensuring that financial performance remains distinct from personal withdrawals. For sole proprietors and partners, consistent monitoring of drawings safeguards capital adequacy, supports cash flow management, and strengthens transparency for investors, auditors, and tax authorities. By following IFRS and GAAP principles, business owners can maintain both accountability and flexibility—protecting the integrity of their financial records while enjoying the rewards of ownership.
✓