In this lesson we're going to go through our earlier drawings example using our sample business, George's Catering, and use it to work out the full journal entry for drawings.
To skip the drawings example and all the explanations below and go straight to the journal entry we record for drawings, click here.
Before we dive into this lesson and our example, a quick reminder of some terms:
Capital vs Drawings
Just as the owner can invest assets in the business from his personal possessions – so too can he remove assets from the business for personal use.
Remember that the investment of assets in a business by the owner is called capital.
When the owner removes assets from his business, we call this by another name. We call this drawings.
This is because the owner withdraws assets.
Drawings are the exact opposite of capital.
In the US drawings are sometimes referred to as the owner's drawing,owner's draw or just draw.
Okay, so let's look at our original drawings example:
d) George Burnham is running short of cash at home. He needs some money to buy his daughter a bicycle for her birthday (i.e. for personal use). He decides to withdraw $500 from the business bank account.
As usual, we're first going to look at how this transaction affects the basic accounting equation and which accounts are affected, and only then will we work out the double entry.
This is how the transaction would affect the accounting equation:
So, what has happened here?
First of all, bank has decreased by $500.
Remember, assets increase on the debit side (left)and decrease on the credit side (right).
So when an asset account decreases, that account is credited.
The owner‘s stake in the assets (owner's equity) has also decreased.
The owner’s equityincreases on the credit side (right). And it decreases on the debit side (left).
So what do we do with the owner’s equity? We debit it.
Journal Entry for Drawings
So the journal entry for drawings is:
Please note that the owner's equity account we use in the above entry is "drawings."
Theoretically we could have debitedthe "capital" account, which would show that it is decreasing.
However, we don't ever debit the "capital" account when assets are withdrawn from the business by the owner. We always debit the "drawings" account.
We keep the capital account as one account for investments in the business by the owner, and drawings as a separate account to show only divestments or withdrawals by the owner.
The double entry above is actually the exact opposite of our earlier owner's equity journal entry (capital), where Mr. Burnham put assets into the business, except that we are now using "drawings" instead of "capital."
In summary, it should be quite apparent again that:
For every transaction there are two entries. For every transaction there is a debit. For every transaction there is a credit. There are no exceptions.
It should also be quite apparent that the debits and credits are based wholly on the above accounting equation.