A drawing account, which is alternatively referred to as a capital account, is one which keeps a record of withdrawals. This is particularly useful for small enterprises, as it functions to keep track of the consumption of funds of the entities involved in the business. Many small businesses, for example, may be described as partnerships. In such a setup, it may be necessary to set up a drawing account for each partner.
The amount of money available in each drawing account is dependent on the percentage of ownership or amount of capital invested by the partner. This is where he will be drawing his money from. Since this system creates both transparency and accountability, it helps maintain a relationship of trust between the partners in a business as well as ensures that the business will always have enough funds left to sustain normal operations. If by the end of the year, there is still balance in the drawing account, this amount is usually redirected to another account, so that the drawing account itself is left without balance.
Even though it may seem that drawing accounts are most beneficial in the case of business partnerships as it helps track actions undertaken by each partner, it can also come in handy for sole proprietorships. In such a setup, there is usually only one entity who withdraws funds from the business. However, keeping a record of such transactions may still be very helpful for accounting and for tax computation. It also gives the business owner a clear picture of how much owner’s equity the business has, because each withdrawal from the drawing account is actually reduces the amount of investment in the business.