How to Take an Accounting Draw

• When your business is a sole proprietorship, you don’t pay yourself wages. You pay yourself by taking the available profit in the business in the form of an owner's draw. You simply write yourself a check from the business checking account without making tax withholdings. For example, if the profit during the month is $6,000, you can write yourself a check in the amount of $6,000. On a sole proprietorship books, the entry would be as follows: credit (reduce) cash on the balance sheet by $6,000 and debit (increase) owner’s draws on the balance sheet by $6,000. By making a draw entry on the balance sheet, you can keep track of how much profit you have actually taken from the business.
  
  

How to Take a Business Withdrawal

• A business withdrawal in accounting terms is the removal of cash, but not to reimburse the owner as in an owner's draw. A withdrawal can be made for a variety of reasons, including reimbursing an employee for a business expense or to pay for a business expense that might require cash such as entertaining a key customer at a sporting event. A withdrawal also can signify the removal of funds from a company retirement account such as a 401k. Also, some companies have a petty-cash fund set up for miscellaneous, small expenses and a withdrawal might also be made from this account for certain incidental expenses.
  
  

Tax Implications of an Owners Draw

• An accounting drawing -- or owner's draw -- is not taxable as such. A sole proprietorship is only taxed based on the profit and loss of a business irrespective of an owner's draws. An owner’s draw has no effect on profit since it is not an expense. For example, if a sole proprietorship shows annual gross sales of $100,000 and $65,000 in expenses, the tax on the business would be based on $35,000, even if the owner took $45,000 in draws. In this case, the owner's draw in excess of the actual profit would simply reduce the owner’s capital account on the balance sheet.
  
  

Considerations

• Owners should be careful to not draw more than the available capital in a business. This could leave the business with cash-flow problems when trying to meet ordinary operating expenses. Also withdrawals from the business should usually be assigned some form of accounting code to denote a particular cash expense. For example if a $200 withdrawal is taken, it should reference some expense category such as travel and entertainment expense on the profit and loss statement.