The Owner's withdrawal (draw) account is an essential part of managing your finances as a sole proprietor. By setting up this account correctly in Bkper and understanding the basic transactions, you can easily track the amount of money you took out of your business for personal activities while you maintain accurate financial records.
Create the Owner's Draw Account:
1. Account Type: Owners withdrawal account is considered a liability type account (colored yellow).
2. Group: Group this account in the "Owners Equity" group.
Note: An Owner's withdrawal account can be created as an Asset type account (colored blue) as a 'receivable' to the company. However, since it the withdrawal directly reduces the Owner's Equity on the Balance Sheet, it's logical to include it in this group as a liability type account.
Understanding the Accounting
- Owner's withdrawal accounts are treated as contra equity accounts. They reduce the owner's equity, which is considered a liability from the companies point of view.
- When you make an owner's contribution of capital, credit the liability account and debit the bank account increasing the owner's equity.
- Conversely, when you make an owner's withdrawal, it decreases the owner's equity. Crediting the bank account and debit the Owner's Withdrawal account.
Add funds to your business (capital contribution):
- Debit: Bank Account
- Credit: Owners Equity (or Owners Contribution)
Record the withdrawal of money for personal use (owner's draw):
- Debit: Owners Draw
- Credit: Bank Account