Drawings Accounts Suggested Handling

[Tax Assistance Program - ( taptax )]

Answering Chris' message:


Message: 9

Date: Thu, 26 Mar 2009 23:34:52 +0000

From: Chris Dennis <cgdennis at btinternet.com>

Subject: Drawings

To: gnucash-user at gnucash.org

Message-ID: <49CC111C.2010205 at btinternet.com>

Content-Type: text/plain; charset=UTF-8; format=flowed



Hello folks



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've been using an account called Equity:Owner's Equity:Drawings, and

transferring money from my bank account and petty cash as required.

That's fine, but the amount in the Drawings account just keeps getting

bigger and makes the balance sheet meaningless.



I should probably close that account at the end of each year, but what

should I close it into?  I don't want previous years' drawings to show

up on this year's balance sheet or income statement.



cheers



Chris

--

Chris Dennis                                  cgdennis at btinternet.com<mailto:cgdennis at btinternet.com>

Fordingbridge, Hampshire, UK


Chris,

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.   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.

My 2 cents. :)

Tom Bullock
South Bend, Indiana, USA