Before studying the accounting for drawings from a business you should appreciate the fact that since businesses exist for the purpose of generating profits, the owners will want to enjoy profits in one form or the other. The owners will sometimes take cash or goods out of the business for their private use to reward themselves for the profits made by the business. Anything taken out of the business by the owner for personal use is called a drawing. Although an increase in drawings is is debited to the drawings account, a drawing should not be classified as a business expense. Anything taken out as drawing will reduce the capital of the business. Therefore the debit entry should be made in the capital account instead of expense account (as drawings decrease capital) with the credit being against an asset account. If the owner took cash out of business, the credit entry will be made in the cash account, or the bank account (if he took out funds from the business bank account). If the owner took out an asset for his use, the credit entry will be against the asset account. For instance the motor car account will be credited if he took out a car for his use, or plant and machinery account if he took out a machine that was being used for production in the business. Although logically all of the entries relating to drawings should be made in the capital account since they reduce the capital, to prevent the capital account becoming full of a lot of trivial transactions, drawings are not entered in the capital account. Instead, a drawings account is opened and the debits are entered there instead of the capital account. This makes it easier for people looking at the balance sheet to get a quick picture. Let us work through a step wise example to illustrate this concept.
Examples
1. On 31 January, the owner takes $100 cash out of the business for his own use.
2. On 28 February, the owner draws $150 from the bank account that was opened in the name of the business.
3. On 15 March, the owner takes $300 of goods out of the business for his own use
When goods are taken for private use, the purchases account should be credited.
