Drawings Accounts Suggested Handling

[Mike or Penny Novack]

>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
>
Sometimes a "wrong" answer can be extremely useful!

No, when reporting for tax purposes or other "official" reporting the 
drawings of the proprietor are not wages. BUT (and this is a big but) 
one of the purposes of financial record keeping is to aid the decision 
making process. In this case the sole proprietor probably does want the 
books kept in such a way as to make it easy to answer the question "what 
if I hired somebody to do one or more of the jobs that I am doing?".

So what is commonly done in sole proprietorship and partnership 
accounting is that "drawings" (total drawings of an owner) are split 
between "regular" (periodic, like salary, usually figured to be about 
what the right salary would be) and "additional". Makes it easier to see 
what "what ifs". Also to tell how you are actually doing (the "wages" 
part of drawings should represent a realistic wage and the "additional" 
part a fair return on invested capital if you are doing well -- if not 
your business venture is not doing well and needs to be justified for 
other reasons*).

This might be a good place to point out that the reports generated 
directly might only be the starting point (provide the data) for the 
"reports" that reflect the realities of "being in business".

Michael

* These might well exist but I won't try to explain.

-- 
There is no possibility of social justice on a dead planet except the equality of the grave.