How to debit and credit withdrawal by owner

 

How to debit and credit withdrawals by owner? Withdrawals or dividends happen when the owner of a company draws cash or other assets for personal uses. The withdrawal transaction is basically the opposite of the owner investment transaction.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In the basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

• Investment by owner
• Purchase of equipment
• Unearned revenues
• Payment of rent expenses
• Insurance as prepayment and the adjusting entry
• Supplies purchase and the adjusting entry
• Withdrawal by owner
• Payment of salaries expense
• What is depreciation

What is an owner’s withdrawal transaction?

In a sole proprietorship, the owner may withdraw assets in the form of cash or other assets from the company for his/her personal use. Withdrawals may be debited to the owner’s capital account to indicate the decrease in owner’s equity. Alternatively, the withdrawals may be recorded in a separate account, called Owner’s Drawings. With the separate account, we can easily determine the total withdrawals made by the owner during the accounting period. Normally, the drawings account will have a debit balance.

 

How to debit and credit withdrawal by owner?

On January 20, S. Gomez (the owner) withdraws $500 asset in the form of cash from the company. The withdrawal is for her personal use.

 

Basic transaction analysis

The withdrawal transaction decreases owner’s equity. In our illustration, a contra-equity account, Owner’s Drawings, increases $500. An asset account, Cash decreases $500.

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the decrease in cash and the decrease in the owner’s equity can be shown in terms of the accounting equation as follows:

 

Debit-credit analysis

According to the debit-credit rule, the decrease in equity as a result of withdrawal by the owner may be debited directly to the owner’s capital account, S. Gomez, Capital $500. Alternatively, it may also be debited to the Owner’s Drawing $500.

The debit-credit rule also requires the decrease in assets to be credited. From the accounting perspective, the Cash account is credited $500.

 

Journal entry

In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.