Drawings Accounts Suggested Handling

[Tax Assistance Program - ( taptax )]

Hi Chris,

Thank you for the courtesy of your reply.  My remarks to which you responded were intended to be a sort of argument by analogy.  When there are different forms of ownership there will be differences in the details.  

Whether a sole proprietor has only himself in the business or also has employees does make a difference.  Another person responding to my original posting wanted to object that drawings were not wages.  The more complex an entity the more there will be accounts to reflect the complexity.  Some businesses have drawings only.  Other have drawings and a long list of items to reflect the nature of the activity in that business.

Thus in some proprietorships one finds salaries or wages accounts have been established for employees and perhaps for the owner(s) as well.

The point of my attempt at an analogy was to point out that in substance the funds an owner pulls from the business should be regarded effectively as wages and definitely need to be closed out (not left open) when the accounting cycle closes.  

The profit and loss accounts are closed to the income summary account which in turn is closed to the proprietorship account.  Similarly, at year-end the drawings account needs to be closed to the Proprietor Capital account.  

It is true that the drawings account more directly reflects the disinvestment in the business by the Owner.  But wages could do that was well, should they be so large that in combination with other expenses they drew down the profit into a loss.  It is just that the effect is somewhat masked by being part of the profit and loss statement rather than being highlighted in the drawings account.

Maybe this clarifies what I wanted to say in the first email.

Tom



-----Original Message-----
From: Chris Dennis [mailto:cgdennis at btinternet.com] 
Sent: Saturday, April 04, 2009 8:33 PM
To: Tax Assistance Program - ( taptax )
Cc: gnucash-user at gnucash.org
Subject: Re: Drawings Accounts Suggested Handling

Tax Assistance Program - ( taptax ) wrote:
> Answering Chris' message:
>> I run a small business and use GnuCash to do the sums.
>> 
>> What's the best way to account for 'Drawings', i.e. the money that I
>> take out of the business?
>  
> 
> I don't know how a Chartered Accountant would answer your question in 
> the UK.  Let me try to reply from a nuts and bolts perspective.
> 
> Your business is a proprietorship, so most likely you don't think of 
> yourself as an employee.  Pretend that you are.  The essence of a 
> drawings account in a proprietorship is analogous to a wages account 
> that a business with an employee has.  Your drawings are wages from the 
> perspective of the set of books you keep for your business. 
> 
> Secondly, it seems to me the only way that the drawings account keeps 
> growing is that it is excluded from the closing process that occurs at 
> your year-end, whenever that is.

Today!

 > If you included your drawings account
> in the year-end closing process, I think your problem would be taken 
> care of automatically.  From the perspective of the business, you should 
> treat your drawings as wages so that your reports reflect a more 
> accurate picture of the profits your efforts generate.

Thanks for your reply Tom.

I'm not convinced that drawings are the same as wages, but I'll have to 
think about it some more.

Certainly getting the year-end closures right will solve a lot of problems.

cheers

Chris
-- 
Chris Dennis                                  cgdennis at btinternet.com
Fordingbridge, Hampshire, UK