Understanding Owner's Drawings Accounting
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Veronica BaileyUnderstanding Owner's Drawings Accounting
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Veronica BaileyDrawings
In Example 2.1 we looked at the owner of the business adding resources to the business
in the form of extra capital. However, it is perfectly possible that the owner will take
resources out of the business for personal use. Resources taken out of the business by
the owner are known as drawings.
As the owner will be withdrawing assets from the business, the relevant asset account
will be credited; the debit entry is in the drawings account. Hence, the double-entry
for drawings is completed as follows:
Account to be debited Drawings
Account to be credited Asset withdrawn by owner
Example 2.9
On 1 October, the owner of the firm takes out £500 from the business bank account
for her own use.
Details DR CR
$ $
Drawings 1 Oct 500.00
Bank 1 Oct 500.00
The total drawings for the year would be transferred to the capital account at the
end of the trading period. This will adjust the existing capital of the business to give
us the new capital account balance for the following trading period – this adjustment
will also appear on the statement of financial position.
Income and expenses
Businesses will incur expenses as part of their normal trading operations. Common
expenses incurred by businesses would include rent, insurance and wages. In addition,
the business may have other income in addition to the sales revenue earned from selling
goods. Additional forms of income for the business may include rental income
(known as rent received).
The double-entry account transactions to record income and expenses are straight
forward.
It is often easier to think of these transactions in terms of their effect on
the bank or cash account – as a payment will involve the bank or cash account being
credited, the debit entry for this transaction must be in the relevant expense account.
Similarly, if money is received as business income then we would debit either the
cash account or the bank account. This means that the credit entry for this transaction
would be in the relevant income account.
For expenses:
Account to be debited Account to be credited
Expense Bank or cash
For income and other revenues:
Account to be debited Account to be credited
Bank or cash Income
Example 2.10
On 9 March, the firm paid wages of £140 in cash.
wages
$
9 Mar cash 140
cash
$ $
9-Mar wages 140
Example 2.11
On 9 March, the firm received a cheque for £250 in respect of rent received.
Rent received
$ $
9-Mar Bank 250
Bank
$
9 - Mar rent received 250
How many different expense accounts should be opened?
An account should be opened for each separate expense generated by the business.
However, it is possible that some of the smaller expenses that are incurred, for example
tea or coffee costs for a staff office, could be kept in a ‘general’ or a ‘sundry’ expenses
account.
It is better to keep each expense separate so as to provide information for the
managers of the business as to what expenses are being incurred, and thus give them
information that can be used to control these costs and prevent them rising too
quickly.
Another way of separating out the accounts is to ensure that expense and income
accounts remain separate. For example, some firms will have an account for both rent
as an expense and rent as an income. Here, two separate accounts are maintained
with the account dealing with rental income referred to as rent received, and the
account dealing with the expense of rent simply referred to as rent.
If there is any doubt in knowing whether you are dealing with an income or an
expense account then just look at the entries made within the account – the expense
account will have the debit entry referring to the means of payment – as in the above
example. Incomes will be credited to the income account as the money received for
the income would be debited to either bank or cash.
Type of expenses
Insurance
Wages
Carriage outwards on goods sold
New office fixture repairs
Motor vehicle repairs
Installation costs of new fixture