Withdrawals by owner are cash or other assets that the owner of a sole proprietorship, or a partner in a partnership, takes out of the business for personal use, recorded in a drawing account. The main entry covers that account in detail, including how it is closed at year end and a worked example.
How withdrawals are treated
Withdrawals go by several names: drawings, owner's draws, owner's withdrawals or simply draws. Whatever the label, they are not a business expense. The owner of an unincorporated business is not an employee, so money taken out is not salary; it is a reduction of the owner's investment in the business. Withdrawals therefore do not appear on the income statement and do not reduce net income.
Each withdrawal is recorded by debiting the drawing account and crediting cash or whichever asset was taken. At the end of the year, the balance is transferred to the owner's capital account through closing entries. The owner's capital at year end equals opening capital, plus any new investment, plus net income, minus withdrawals.
Owners can also withdraw assets other than cash, such as inventory or equipment taken home, and these are recorded at cost in the same way. For tax, a sole proprietor is taxed on the business's profit whether or not it is withdrawn, so the size of withdrawals does not change the tax bill. In a corporation, the comparable payments to shareholders are dividends.