Drawings A/C

Shahid_fss · 01-09-2005, 03:19 AM

Every account is treated in different ways in accounting.
Mostly rules of Income, Expense, Asset and Liability are followed.
I have discussed many of my teachers about the nature of drawings account but no one of them could clear my confusion.
I think it is a Liability and handled by following all the rules of a liability account.
I think many of you would know better about it.
I will also explaine why I consider it as a Liability if your views are different.

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Azeem Shah Khan · 01-09-2005, 04:12 AM

Dear Shahid

Please donot read the explanations written within brackets next to the terms in CAPS if you already know them.

Based on the the BASIC 5 categories, Drawings fall under CONTRA LIABILITIES. An even more basic category would be CONTRA CAPITAL.
This raises another question as to what is Capital. Well if we are talking in context of a LIMITED COMPANY(a separate legal entity) then there are TWO different kinds of liabilities, namely External Liabilities and Internal Liabilities. By external liabililties we mean Obligations to transfer ASSETS(existing or future economic benefits) to a person(a separate entity) other than the SHAREHOLDERS/DIRECTORS of the company for e.g. Trade Creditors etc. By internal liabilities we mean obligations to transfer assets to the SHAREHOLDERS/DIRECTORS. Please note that in both the cases viz Liabilities or Share Capital there is an element of OBLIGATION TO TRANSFER ASSESTS and that is what constitutes LIABILITY.

I hope the above basic definition of Liability will help you understand the concept of Drawings.

By the way CONTRA means REVERSE or OPPOSITE OF.

Kind Regards

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."

maani · 01-09-2005, 10:59 PM

Hi...drawings is a contra capital account...
even in my opinion there is no need of drawings account...
see this entry...when the owner makes a drawing

DRCapital Account
CRCash Account

or

DRCapital Account
CRAsset Account

In the same way in a Partnership business the drawings of the parners are adusted against their capital accounts or current accounts...

Ace

Mr. Whappaaaa · 01-09-2005, 11:24 PM

AOA SHAHID FSS

Yes exactly, Azeem's post is good enough for describing the drawing a/c. in a limited company. But if u mean to know about the Drawing in a Sole Trading business that would be as follows

"Basically drawing a/c is the reduction of capital(as was said by Contra Capital).Its the amount(or might be merchandise which are used in business) where the Proprietor uses it personelly during the course of a business in anticipation of PROFIT"

SUPPOSE

Owner, Capital is 100,000 (opening balance)

ADD PROFIT 50,000
lessdrawing(20,000)

profit increases 30,000 then add back to opening balance of capital.(ie. 130,000 closing balance of capital. What i mean to say is that capital was reduced by 20,000)

Although, Shareholders of a company are not allowed to withdraw any thing in anticipation of profits. Hence this term is solely used for the Sole proprietorship (or Partnership).

Hope, ur problem will be solved.

REGARDS

ASIF ALI

Apocalypse · 01-10-2005, 03:59 AM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>Although, Shareholders of a company are not allowed to withdraw any thing in anticipation of profits. Hence this term is solely used for the Sole proprietorship (or Partnership). <hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

in this case an interim dividend is announced, so actually they withdraw in anticipation of profits.

Azeem Shah Khan · 01-10-2005, 04:41 AM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>Hi...drawings is a contra capital account...
even in my opinion there is no need of drawings account...<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

why do we have P&L/Income Summary/Retained Earnings accounts, after all they all go to capital account.

there must be a reason for it!!! think hard!!!

cheeeeeeeeeers

"You don't get to choose how you're going to die. Or when. You can only decide how you're going to live. Now."

maani · 01-11-2005, 06:00 AM

Hi Azeem Khan,
"why do we have P&L/Income Summary/Retained Earnings accounts, after all they all go to capital account.

there must be a reason for it!!! think hard!!!"

When we introduce capital in business we simply adds it to the existing capital...without opening an "introduction account"...then y we need a drawing account when we take back some amount from capital...?
I think its not necessary to open a drawings account...

Ace

Bluewednesday · 01-11-2005, 07:38 PM

I have answered your query on accountancystudents.co.uk. A drawings account is only for a sole trader and partnership, not a limited company.

A drawings account is needed to reconcile the capital account i.e. in the financed by section;

Capital b/f
+ cash introduced
+profit for the year
- drawings
= Capital c/f

If a seperate drawings record is not made, it is quite difficult to calculate this figure.

Annette

Shahid_fss · 01-12-2005, 12:57 AM

Sometime drawings account becomes neccessory i.e interest on drawings. If we have not maintained a drawings a/c, we can't calculate interest on drawigs.
*******************************************************************
As for P&l/Income summery, they are required to find out the profit (and many other things are related to them). Retained earnings account is also related with tax afairs.
*******************************************************************
I would would also like to share with you people that it is not an item of balance sheet, is it? Cause it's a temrery accout (If we classify accounts according to P&L a/c and Balance Sheet then all Temp accounts are the members of P&L and all Permanent accounts are members of Balance Sheet). It goes to capital account and is automatically deducted.
*******************************************************************
Mr. Maani said that it's not neccessory although bluewednesday's reasons are also strong but I agree with maani beacause if we don't use drawings a/c it will not effect the value of capital.
i.e
A firm's owner with a capital of 200,000 using derawings account draws 50,000 three times
Capital (Balance) = capital - drawings
50,000 = 200,000 - 150,000
A firm with same situation don't use drawings account
Capital (Balance) = Cr side - Dr side
50,000 = 200,000 - 150,000

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Shahid_fss · 01-12-2005, 01:07 AM

If interest is the only reason to create a seperate account for drawings and all owners of a firm/Co. have an agreement that don't allow interest on drawings, drawings account can be ignored for there is no need to calculate total drawings of owners individually. If anyone can provide some other reasons please post them.

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`*`*`*` and Smiling;
*`````* Always.
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Bluewednesday · 01-12-2005, 02:29 AM

The reasons I stated before still stand. This is the bottom half of a balance sheet;

Financed by-
CAPITAL ACCOUNT
Balance brought forward 23,362
Capital introduced -
Net profit for the year 34,938
58,300
Less drawings (26,909)
31,391

The 31,391 figure agrees to the net assets. If a drawings account is not used this figure is more difficult to obtain, although I understand that it is just reducing capital. Next year capital b/f would be 31,391 as drawings is netted off it.

Annette

Shahid_fss · 01-12-2005, 04:10 AM

Ok I will use entries that are already explained by Mr. Maani

A firm's owner with capital of 1000 draws 200

--------------------------------------------------------------
1- In case of drawings a/c

Drawings....dr 200
Cash.........cr 200

now drawings account has a balance of Rs 1000
After deducting the same amount from capital; 1000-200 = 800

---------------------------------------------------------------
2- In case of no drawings a/c

Capital.....dr 200
Cash..........cr 200

Decrease in capital is always debited. Here Capital account is dedited which means it is reduced by 200 and the amount balance left is Rs 800
Answer is same without having a drawings a/c
---------------------------------------------------------------

I think discussion has entered into a very interesting point so other member should decide what is right. Where is Mr. Maani he can explaine his saying (even in my opinion there is no need of drawings account) more better.
Is my anylises right guys or not??

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*`*`*`* Shining;
`*`*`*` and Smiling;
*`````* Always.
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Bluewednesday · 01-12-2005, 06:53 AM

We are both saying the same thing. It is only for ease of completing the balance sheet that the drawings are kept as a seperate record. I work in accounting practice and we always use a drawings account, not essential, just easier. Let's just call it good practice.

Annette

maani · 01-13-2005, 07:30 PM

hi...
the people who are of the view that drawings account will make the things easier...
then y they should not open an introduction account while introducing the additional capital in the business...

DRCash
CRIntroduction Account

and

DRIntroduction Account
CRCapital Account

They ll remember the amount of capital introduced in this way...

Waisay upto now there is no solid reason for the drawings account...

Ace

Bluewednesday · 01-13-2005, 07:51 PM

I refer to my previous answer, there is also a cash introduced account. I would imagine that the fact that these accounts are used in practice shows that there is a need for them.

I don't know how else to explain it so you understand what I mean. Do you work in practice at all? What work experience do you have? Maybe I can find a better way if I knew what you did for a living?

Annette