Understand drawings in accounting, how they are treated in the financial statements of a sole proprietor and the tax implications.
1. What are Drawings in Accounting?
Drawings in accounting refer to any sums of money taken by individuals who are registered as self-employed (sole traders) and the members of a partnership from their business for personal items and salary.
Sole trader salaries are not treated as an allowable business expense. The reason for this is that sole proprietors are taxed on all their earnings during the tax year, regardless of how much they draw as salary.
The concept of drawings is not relevant for owners of a Limited Company. Money drawn will normally be taken as PAYE salary, dividend or allocated to their directors’ loan account.
2. The Accounting Treatment of Drawings
Drawings are shown as part of the balance sheet. Since they are not an expense, they do not appear on the income and expenditure statement. Any drawings will be deducted from the owners capital, labelled drawings, to reduce retained profit in the business or capital introduced, whichever is most appropriate for the reason the money was taken.